Given rising domestic inflation amidst supply disruptions, the RBI should allow the rupee to appreciate as it can reduce imported inflation with rising metals and oil prices and eliminate excess liquidity to some extent, according to Soumya Kanti Ghosh, the group’s chief economic adviser. , National Bank of India.
“With CAD [current account deficit] to a comfortable situation and an extremely unlikely devastating third Covid [wave], the Indian rupee will handle any further reduction with relative calm, ”Ghosh said in the latest edition of the SBI’s Ecowrap research report.
View of the weekly rupee: INR could weaken to 75.25
“The rupee has had a tumultuous 2020, with the news of Covid-19 causing the exchange rate to drop rapidly. However, the rupee started to strengthen as India recorded a current account surplus and foreign investors maintained their confidence in the economy by pouring in capital. RBI had continuously made currency purchases. In FY21, RBI purchased 5.1 trillion yen of foreign currency and its foreign exchange reserves increased by 103.72 billion dollars. Despite the second wave of Covid-19, the rupee strengthened and even fell below 73 per dollar, ”Ghosh added.
However, recently the rupee fell from 73.09 per dollar on September 1 to a low of 75.52 on October 12. It has since started to appreciate and is currently around 75. If we look at the turnover in the forex market, there has been an oversupply. to $ 2.2 billion in August 2021. This shows that the rupee’s appreciation bias persists.
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The September 2021 merchandise trade deficit of $ 22.59 billion is quite large and has its closest equivalent in October 2012 at $ 20.21 billion. But keep in mind that trade data shows seasonality and an increase in imports and exports is quite common at every quarter-end, Ghosh said.
So far, Indian exports are doing quite well. India’s merchandise exports in April-September 2021 were valued at $ 197.9 billion, a sharp increase of 24.3% from $ 159.2 billion in April-September 2019. In terms of composition, engineering goods are the most valued. India has also seen a considerable increase in products such as cereal preparations, cotton, electronics. drugs and chemicals. “So reaching the $ 400 billion target is no pipe dream and will provide a solid cushion to the current account balance, even if oil import bills are rising rapidly. Taking everything into account, our CAD projections are (-) 1.4 percent. India is also experiencing strong FDI inflows, although REIT inflows show some volatility, ”added Ghosh.