The Indian rupee has again taken a beating by posting a slow erosion against the U.S. dollar on rising world oil prices and economic uncertainties related to a slowing economy of China. As both external and domestic factors continue to have an impact, analysts said, both elements make the road ahead really challenging for the Indian rupee.
Impact of Rising Oil Prices
India’s heavy dependency on imported oil makes it rather vulnerable to rising crude prices. The increasing global oil prices have weighed on the rupee as its import bill widens, elevating the deficit in the current account. A weaker rupee would lead to costlier oil imports, adding to the inflationary pressures in the economy.
As the RBI has to perform a tight rope walking between the rupee stabilization and monetary policy for inflation control, the brent crude stays above $ 90 per barrel.
China’s Growth Slowdown Adds to Risks
It continues to be vulnerable to global fluctuations in investor sentiment, led by the economic challenges of China. In response to growing concerns over China’s slowing growth, investors are rebalancing their portfolios; as a result, capital outflows from India-like emerging markets have gone up. As foreign money moves into less risky assets, additional downward pressure has been seen on the rupee.
India’s currency is caught in the cross-currents of rising oil prices and global reallocation risks,” said a senior economist. “The China slowdown is leading to shifts in investor strategy, affecting flows into Indian equities and debt.”
RBI Intervention on the Horizon?
The RBI has been keenly watching the gyrations of the rupee and can operate in the forward market to give volatility a fillip. However, the central bank may not be overtly aggressive but instead conserve foreign exchange reserves for rainier days.
Despite near-term headwinds, some analysts continue to be optimistic about the longer-term prospects of the rupee, given strong economic fundamentals and stable inflows of FDI into India.
Rupee Outlook
It will keep pressure on oil prices high, and the nature of risks from China is changing. The rupee is most likely to gradually depreciate during the course of the coming months. Global commodity trends and developments in central banks would give further cues for the rupee’s trajectory.
