Rupee at 85 to a Dollar: Sinking Towards 100?

The Indian rupee fell below Rs 85 to a dollar last week.In November 2024, the merchandise trade balance exceeded $37 billion – more than the total exports of $32 billion. Services – the pariah of government policy – managed to clock $36 billion of exports, exceeding the merchandise exports for the first time. The April-November overall trade account deficit touched $83 billion, putting massive pressure on the rupee.Foreign portfolio investment (FPI) inflows, the opportunistic brother of foreign direct investment (FDI), had crossed Rs 1 lakh crore in the first nine months of calendar year 2024. FPI outflows of Rs 1.16 lakh crore in October-November washed out all these. FDI, in any case, has become a reluctant suitor for India. FPIs' conduct has put the largest pressure on the rupee.Debt inflows were consistently good in the first nine months on the back of India’s inclusion in global bond indices. Small but negative debt outflows in October and November are enough to sound alarm for the rupee.US President Donald Trump is wielding sword of higher tariffs on every exporter with trade surplus with the US, including India. His disruptive tactic has put pressure on China, Vietnam, and others – and they have begun depreciating their currencies. This will definitely put its own pressure on the Indian rupee.Trump's Win Shows That Despite Everything, the US Political System is RobustThe Reserve Bank of India (RBI) has spent foreign currency reserves of about $50 billion in last three months from its peak foreign exchange reserves of $705 billion, which, alas, has been unable to stem the fall.Is rupee caught in a maelstrom? Is it heading to Rs 100 to a dollar?While India’s merchandise exports recorded growth of about 2 percent in seven months, imports growth exceeded 8 percent.Unable to fast-track renewable energy (RE), India’s import dependence on petroleum products continue to remain elevated, leading to $123 billion of imports in seven months.Frenzied purchase of gold by people (for both jewellery and investment), accompanied by purchases by the RBI, in the era of high global prices thanks to purchases by Chinese and others to reduce dependence on the dollar reserves, made gold imports shoot up to $49 billion in seven months, recording year-on-year growth of about 50 percent.India’s electronics exports have done well thanks largely to Apple making India its home for the production of iPhones. Electronics exports clocked about $23 billion in seven months, growing at about 28 percent.India’s dependence on import of electronic goods, however, continues unabated with India importing $64 billion of electronics (11 percent growth). Indian electronic goods imports are on way to cross $100 billion this year and will most likely have a negative trade balance of about $60-70 billion for the full year.Merchandise trade deficit has crossed $200 billion in seven months. A likely annual deficit of about $325-350 billion will put enormous pressure on the rupee for not only current year, but for many years to come considering the rigidity of India’s import basket and the inability to grow exports.RBI's Policy Talk on Tackling Inflation is Nothing But OpticsIndia has indeed developed a strong export franchise in not only IT services but also in setting up global capability centers (GCCs) that employ over 1.5 million talented Indians for highly productive use. About 50 percent of the global companies have their GCCs in India to meet their diverse needs, including of research and product development.Indian services talent is also expanding rapidly in many other business, financial, and personal services. India, in contrast to its merchandise counterpart, import much less of services, and generate good surplus despite Indians’ itch to travel abroad and seek overseas education.India exported $252 billion worth of services during April-November against $132 billion imports, generating big trade surplus of $119 billion. There is every reason to expect that services trade should yield trade surplus of about $200 billion during 2024-25.This will certainly relieve pressure on the rupee. Considering humungous merchandise trade deficit, however, its impact will remain limited.India manages to keep its head above the water by meeting its current account deficit from higher compensating inflows on capital account with FDI, FPI, NRI deposits and external commercial borrowing (ECB) inflows making decent contributions. Unfortunately, a confluence of factors has made India’s capital account quite vulnerable currently.Extraordinary high valuation of Indian equity prices in secondary market, literal reopening of Chinese equity markets three months back, and the depreciating rupee have made FPI inflows reverse in current quarter. These factors are going to persist.Narrowing of interest yields between rupee securities and dollar bonds has made debt FPI investors also turn away. ECBs are becoming costlier than the domestic fund-raise for triple A corporates. Inflows from multilateral agencies have got subdued. There are enough straws to indicate that debt flows will also see a thaw.NRI deposits are understandably opportunistic. As differential return between NRO deposits and dollar deposits abroad thin, there is every likelihood that NRI deposit flows might also slow down.FDI inflows began shrinking last year. Current year is no better. Start-ups, faced with prolonged funding winter, are raising funds in domestic equity markets at much lower costs. FDI inflows cushioning impact is in serious doubt going forward.All in all, it is no surprise that capital account inflows have not been sufficient enough to take care of current account deficit this year, forcing the RBI to sell its reserves. This phenomenon seems likely to last for quite some time.Irrespective of the fact whether Trump's tantrums succeed in reducing US trade account deficits ($773 billion in 2023, merchandise $1,062 billion, and services surplus $288 billion), the US dollar is going to become stronger weakling other currencies.Depreciating currencies to protect export value and profits in local currency is going to be an important coping strategy of the countries with large trade surplus with the US. China has surplus exceeding $200 billion and Vietnam $100 billion (India’s surplus is about $30 billion). A consequence of this is likely to be a mini currency war amongst India’s competitors. India will also, willy-nilly, get drawn into this.Trump might also restrict import of renewable energy, steel, and many other products into US. This will make China, Vietnam, and other countries dump their surplus production on other countries. India will not be able to escape such dumping.The cumulative effect of all above would cause considerable headache to the RBI, which is caught between the rock of protecting its foreign exchange reserves and hard place of protecting rupee exchange value.The RBI has a tough battle on hand which will most likely leave the RBI and the rupee with a lot of bruises.On the face of it, such a possibility sounds alarming. In the real world, it is not that unlikely.The Indian rupee at about Rs 70 to a dollar in December 2019 has depreciated by over 20 percent in five years to Rs 85 to a dollar in December 2024. A 20 percent depreciation in the next five years will take the India rupee over Rs 100 to a dollar in December 2029.India’s current economic policy framework, lack of real reforms, and structural inabilities and vulnerabilities dwelt upon above, if they persist which is quite likely, will make the rupee most likely fall to Rs 87-88 to a dollar in December 2025, cross Rs 95 to a dollar in 2027, and breach Rs 100 mark in 2029, when the Narendra Modi government completes its third term.(Subhash Chandra Garg is the Chief Policy Advisor, SUBHANJALI, and Former Finance and Economic Affairs Secretary, Government of India. He's the author of many books, including The $10 Trillion Dream Dented, We Also Make Policy, and Explanation and Commentary on Budget 2024-25. This is an opinion piece, and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)

BECOME A MEMBER

Rupee at 85 to a Dollar: Sinking Towards 100?

On the face of it, such a possibility sounds alarming. In the real world, it is not that unlikely.

Read Latest News and Breaking News at The Quint, browse for more from opinion

Topics: Rupee Dollar