The rupee may average at 69.79 to the dollar in the second half, down 8.3 per cent from the first half if the monetary authority props it up by mobilising at least USD 30 billion from NRIs as it has done in 2013.
The rupee is the worst-performing emerging market currency losing over 15 per cent year-to-date, while in the first half it averaged at 68.57 to the dollar, down 8.3 per cent year-on-year, making the depreciation at a five-year high so far, says an India Rating report.
Following the market mayhem and the rupee plunge after the Fed 'taper tantrum' in summer of 2013, RBI mobilised USD 25 billion from non-resident Indians. The move was initiated by the then governor Raghuram Rajan soon after he took over the RBI reins in September that year.
"The rupee depreciation against the dollar so far is at a five-year high. But a longer term view suggests that average depreciation during FY15-FY19 will be only 3 per cent, which is at par with the 20 years (FY1999-FY18) average depreciation," Devendra Pant, the chief economist at the agency said in a note Thursday.
He further said the rupee may average at 69.79 to the dollar in the second half, down 8.3 per cent from the first half provided the RBI mops up at least USD 30 billion from NRIs as it has done in 2013.
According to him, the rupee pain emanates from global developments such as strengthening dollar; high commodity prices especially of crude oil; rising US rates, coupled with domestic factors like widening trade/current account deficit, inflationary pressures and likely fiscal slippage.
"The current bout of a sharp deterioration in the rupee is the fourth such instance in the current decade indicating its vulnerability to global events," he said.
It can be noted that after-2013 episode when it had plunged to 86.83 to a dollar on August 30 that year, the rupee has enjoyed a relatively stable run, due to mobilisation of NRI deposits in foreign currency non-repatriable account; crash in global commodity prices, especially crude from September 2014, and delayed monetary tightening by the US Fed.
"But all these changed at the turn of FY19 due to a sudden spurt in oil prices and a reversal in capital flows, although chinks in this seemingly happy equilibrium had emerged in FY18 itself," he said.
The country meets over 82 per cent of oil demand by crude imports. Though dollar requirements to fund merchandise imports has risen, there have been no commensurate earnings from merchandise exports.
While the first line of rupee defence has traditionally been invisible, remittances and software earnings, this time around these could not grow at the same pace as merchandise imports. This widened the current account deficit and put the rupee under pressure.
The second line of defence comes from the capital account, where portfolio investments, FDI and ECBs play the key role. As long as US interest rates remained low and arbitrage was attractive, portfolio investments kept pouring in, not only keeping the rupee steady, but also leading to rupee gains during 2014-17.
But with US rates rising, the country saw net outflows of about USD 8.14 billion in the first half of the fiscal, leading to sustained rupee weakness throughout this fiscal.
Pant also advised against import controls to defend the rupee and warned that the recent government decision to slap the higher import duty on select items at best may impact some of the electronic goods categories only.
The total contribution of electronic goods to trade deficit during April-August 2019 was 28.1 per cent, while petroleum products, which largely have inelastic demand, contributed a whopping 48.2 per cent of trade deficit during the same period.