As per a Reuters report, Siddharth Mathur, head of EM research, APAC at BNP Paribas said, the likelihood that the U.S. Federal Reserve hikes rates more than what the market has priced in or rates remain higher for longer may also cause the rupee to depreciate significantly.
BNP Paribas analyst estimates India's CAD to stay north of 3% and require financing. Thereby, RBI will be looking to add to its pile of forex reserves which is likely to be the key reason for the rupee's underperformance.
India's CAD deficit is expected to remain elevated this year on the back of high crude oil. BNP analyst expects crude to range between $80s-$90s-per-barrel for 2023.
Recently, Deloitte in its report also warned that India’s current account deficit (CAD) is set to worsen going forward led by higher imports and slower exports.
According to Deloitte, India’s current account is expected to worsen relative to other nations. India is expected to witness a very high CAD. It is the only nation expected to see a sizeable rise in CAD due to higher imports and slower export.
Deloitte's note added, "The pressure on the rupee is worrisome and India could deal with the situation by restricting imports of non-essentials or looking for alternative cheaper import destinations." Hence, it said, "Keeping an eagle eye on two ‘I’s will be imperative–Inflation and INR."
In September 2022 quarter, India’s current account deficit (CAD) widened to a nine-year high of 4.4% of gross domestic product (GDP) -- compared to 2.2% in the June quarter, primarily due to a widening goods trade deficit and an increase in net outgo under investment income.
In regards to Fed's hawkish rhetoric, the minutes for December 2022 meeting have indicated that the US central bank officials don’t want to take inflation lightly and will continue to maintain their aggressive approach.
Reuters report added that in Mathur's view, the divergence between the actions the Fed is signaling and market expectations is a concern for the rupee. He added that inflation will be more persistent than the consensus, hence the Fed will have to do a little bit more.
With inflation expected to remain high in the near term, Deloitte also expects RBI also to keep monetary policy tight. That may impact consumption and investment going forward, moderating demand.
