Amid the ongoing concerns of global economic slowdown and a possible recession in the United States (US), the Bank of Baroda in a report on Saturday has said that a weaker rupee will improve India’s export competitiveness.
According to government data, India’s exports reportedly contracted by 15.88 per cent to USD 32.25 billion in July this year. The export shrink is attributed to a slowdown in global demand and a fall in the outbound shipments of petroleum, gems and jewellery, and other key sectors.
The report mentioned that the weakness in the Indian rupee can be attributed to external factors, even as domestic factors remain favourable.
Notably, the Indian rupee depreciated to a fresh record-low of 83.15/USD on Friday. While there has been some correction in today’s session, it continues to trade above the 83/USD mark.
News reports suggested that RBI has been actively intervening in the forex market to prevent a sharp fall in the Indian rupee. “Even so, there is a belief that RBI may be more accepting of a weaker rupee, especially since export growth faces headwinds,” it added.
India’s central bank RBI has always maintained its stance that it its intervention in the currency market is limited to curb excess volatility in the forex market, and given its abundant forex reserves, it will continue to do so.
In the past, RBI had shown a firm stance to defend the 83/USD mark, which has been breached. With the current global backdrop, more pressure on the Indian rupee looks inevitable and hence we may see the Indian rupee moving upwards.
Higher-than-expected domestic inflation will also work against the Indian rupee, according to the report.
While the global backdrop suggests a weakening currency, a squeeze in domestic liquidity post the implementation of incremental CRR requirements may limit RBI’s ability to intervene in the currency market. “In such a scenario, we may see the Indian rupee drifting closer to 84/USD level,” BoB added.
Support for the Indian rupee will come from steady FPI inflows and a correction in oil prices (lower demand due to weak growth in China), it mentioned.