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Year to date, the pair USD/INR grew by more than 7%. The weakening of the local currency could be explained on the one hand by the withdrawal of foreign investors from the “Jewel in the Crown” and on the other hand by the strengthening of the dollar, rising energy prices, and a high level of uncertainty due to geopolitical tensions.
According to Goldman Sachs, since October 2021, foreign investors have withdrawn a record $33 billion from the Indian stock market, in June the monthly outflow of funds reached a maximum of $6.3 billion. The abandonment of local assets due to rising interest rates, slowing economic growth, and the geopolitical situation.
What about the regulator? To stabilize the Indian rupee, the Reserve Bank of India has been selling dollars through state-owned banks at some intervals. In addition, the country has raised duties on gold imports to 12.5% from 7.5% previously. Further weakening of the local currency suggests that the desired result has not yet been achieved.
Analysts of Nomura Holdings Inc and Morgan Stanley expect that by September the Indian rupee will fall to a mark of 82 to the dollar. The options market puts that scenario at 67% probability, down from 50% in early July. Still, let’s not forget that the country has nearly $600 billion in foreign exchange reserves.
Thus, the RBI has enough funds to cope with an excessive weakening of the currency. The problem is that the excessive activity of the regulator in the market may be seen by some countries as a “reverse currency war”. There is still hope that the government’s decision to start conducting international trade settlements in rupees will reduce pressure on the Indian rupee.
