Rupee headed lower as RBI intervention unlikely to be "aggressive"

• The Indian Rupee has lost nearly a tenth of its value against the US Dollar this year, and analysts say more pain could be in store.
• The US Dollar has gained against most of the major currencies of the world as the US Fed has gone on a rate hike spree to tame inflation.
• Not just the INR, all major currencies around the world have slumped this year – some of them have lost a quarter of their value already.

The Indian Rupee could soon breach the 82 barrier against the greenback, after the Dollar index surged over 20% this year, bordering on levels that usually cause a financial crisis.

Earlier, analysts had suggested that the Rupee could fall to 81 against the US Dollar by the end of 2022 – but that has already happened and currency experts suggest more pain is in store.

“We may see the rupee depreciating further, and a move closer to 82/$ cannot be ruled out,” a new report by Bank of Baroda Research said.

The INR logged a massive decline last week as the US Fed announced a 75 bps rate hike – it fell 1.1%, second only to the Korean Won, which fell 1.2%. It was amongst the worst performing major currencies, while Japanese Yen and Brazilian Real were amongst the best performers.

Has RBI changed its forex intervention strategy?

RBI defended the currency around 80 levels doggedly, with its intervention costing billions of dollars. However, the Rupee’s fall has been sharper and faster after it breached the 80 mark.

“This marks a significant shift in the RBI’s forex intervention strategy as in the past RBI had shown a strong intent to defend the 80/$ mark,” the BoB report said.

Going forward, RBI might be inclined to be less aggressive in its defense of the Rupee, especially now that liquidity in the banking system slipped in the red for the first time in 40 months.

“Given the global backdrop of a strong dollar and continued weakness in other currencies, it seems likely that the RBI may not be as aggressive as in the past to curb the decline in the exchange rate. Hence, we may see the INR depreciate further, and a move closer to 82/$ cannot be ruled out,” the BOB report said.

In 2022 so far, RBI’s total forex reserves have fallen by $88 billion.

The consensus seems to be veering to the view that RBI will hike policy rates by 50 bps instead of 35 bps as expected by some earlier. But this would be a small price to pay for currency stability.

According to Churchil Bhatt, Executive Vice President Debt Investments, Kotak Mahindra Life Insurance Company, “It is time for the bond market to take one for the rupee. The fact that the MPC (monetary policy committee) may hike policy rates by 50 bps instead of 35 bps is not necessarily a game changer for bond markets. In fact, it is a small price to pay for managing currency volatility.”

Here’s how the world’s major currencies have performed against the US Dollar this year:

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