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Rupee likely to go to 81-82 to the US dollar, or even higher. Here’s why. And why you should (not) care

Rupee likely to go to 81-82 to the US dollar, or even higher. Here’s why. And why you should (not) care

At end of trading on September 22, the rupee closed at 80.86 against the US dollar, its lowest ever, and about 7 per cent lower than in January. By the time you read this, it might well have breached 81.

The rupee is likely to get dearer as the days and weeks go by. The rupee is likely to get dearer as the days and weeks go by.

You already know the dollar just got dearer. Right. Now, that’s good news for exporters, but not so much for importers, where there seems to be more action these days.

But here’s the thing. The rupee is likely to get dearer as the days and weeks go by. Why so? Munch this.

On September 21, when the US Federal Reserve raised its benchmark interest rate by 0.75 per cent for the third consecutive time, the interest rate reached 3 per cent. That would have been close to the Fed members’ earlier consensus in June of the terminal rate of 3.4 per cent for the year (terminal rate is the peak benchmark interest rate which, once reached, sees the Fed start to cut rates). 

The ‘would have been’ part is courtesy the Fed members’ decision to play spoilsport by shifting the terminal rate goalpost. In the current (September) rate hike push, the Fed members’ consensus for the terminal rate for 2022 rose to 4.4 per cent, and for 2023 to 4.6 per cent. 

That means the Fed has given itself elbow room to raise interest rates by a further 120-140 basis points this year! And some more next year, thank you.

Now, while the hike in interest rate matched market expectations, the change in the terminal rate came as a surprise. Naturally, the rupee took a bigger beating than expected. At end of trading on September 22, the rupee closed at 80.86 against the US dollar, its lowest ever, and about 7 per cent lower than in January. By the time you read this, it might well have breached 81.

And the Fed’s terminal rate hop-skip-and-jump means that the rupee is likely to fall further, beyond anyone’s earlier estimates. Vivek Kumar, an economist at Quant Eco told Business Today that their earlier estimate was 81 for the rupee against the dollar. “But now, there is a risk that the rupee would be weaker than what we were projecting earlier,” he said, adding that the Fed’s peers worldwide are unlikely to be able to match the extent of its tightening.

Leading economist Arun Kumar cautioned that this kind of steep rate hike by the US fed could lead to recession, adding: “I think the rupee will be around 81-82 level going forward in the next six months only if the RBI intervenes. If not, then it could go beyond that.”

The rupee beyond 82, and its impact, is something that might get real soon. Will the RBI intervene? Likely. But a report from Reuters said that the Indian government is not averse to a weaker rupee against the dollar in line with global market fundamentals. That would seem to make sense given the country’s falling dollar reserves, but it would also mean that the RBI and the government would need to quickly--the operative word here being ‘quickly’--agree on the way forward.

Meanwhile, if you are an exporter, go chill. And if you are an importer, well…