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Repayment demand, oil prices may take rupee to 72

Mumbai: The Reserve Bank of India’s intervention in the currency market may have halted the slide of the Indian rupee, but it may be temporary as the repayment demand of short-term debt of Indian companies could soon exert pressure taking it to new lows.
Foreign exchange reserves have dipped more than $20 billion from the peak in the past two months as the Reserve Bank of India sold to stabilise the rupee. It is said to have sold another $20 billion in the forwards market as well.
India’s short-term debt at $222 billion is more than half the total foreign exchange reserves. These are funds that Indian companies raised to take low interest rate advantage in the West.
While some of them have hedged their positions and others have export income to pay for, many are exposed to the lower value of currency that could erode their profitability as well.
The currency may slide to a low of 72 to the US dollar in the next few quarters as rising oil prices, slowing foreign portfolio flows and the demand for debt repayment put pressure.
“Given that oil prices are rising and with a pick-up in import demand, we expect current account deficit to widen to 2.6 per cent of GDP,” said Siddhartha Sanyal, chief India economist at Barclays. “With FDI flows funding only part of the gap and uncertainties over FII inflows, we expect the rupee to touch 72 against the dollar by the end of 2018.”
Indian Rupee has been under pressure this year along with other emerging market currencies as the US Federal Reserve raises rates in its efforts to normalise the decade- old easy monetary policy. As leveraged funds begin to unwind their carry trade, EM currencies are facing pressure.
Central banks of Indonesia and Turkey, along with India, have raised interest rates to arrest flight of capital.
India’s foreign exchange reserves are at $406 billion. Rising import bill is already shrinking the import cover, too. Crude oil prices have risen more than 90 per cent from its low touched two years ago. India imports more than three fourths of its oil needs. The RBI has already sold $24 billion in both the spot and forward markets this fiscal. Yet the rupee has slipped 6 per cent against the dollar. It touched a life low of 69.09 last month.
In the June quarter, foreign investors pulled out close to $ 7 billion or Rs 45,571 crore from the Indian markets. The reserves are now adequate to fund about nine months’ imports. Pressure of funding our current account deficit will likely push beyond Rs 70 by September, according to Bank of America Merrill Lynch.
“If FPI flows do not revive by the December quarter, the RBI would then have to sell $20 billion to fund $65 billion current account deficit,” said Indranil Sengupta of Bank of America Merrill Lynch.