The rupee, which Tuesday fell to a new record low on unabated withdrawals by portfolio investors amid tightening global monetary conditions, could face further pressure as record external debt comes up for repayment through the course of this fiscal year and the next and India’s trade gap widens.
More than 40%, or $267 billion worth of external debt of the total $621 billion, is due for repayment in the next nine months, the Reserve Bank of India data showed. This repayment is equivalent to about 44% of the India’s foreign exchange reserves.
While many corporates would have either tied up fresh lines of credit or accumulated export earnings to repay the debt denominated in US dollars, the short time period within which these funds must be repaid could exert pressure on rupee, currency traders said.
“The current local macro setup is driven by a record current account deficit, primarily due to oil imports,” said Ashhish Vaidya, managing director, DBS Bank India. “Coupled with this, the overall dollar strength, triggered by higher US rate trajectory and risk-off sentiment, is contributing to rupee’s rout.”
US Rate Hikes to Accelerate FPI Outflows
“It will likely come under more pressure amid the impending external debt maturities. In the next three to six months, this scenario can create more volatility before it starts stabilising with improving local and global macros,” Vaidya said.
The rupee fell to a new record low of 79.38 to the US dollar on Tuesday, a day after India logged a record trade deficit at $25.6 billion in June, up from $24.3 billion in May. The unit lost more than half a percentage point to close at 79.37 to the dollar. Economists estimate the current account deficit, or excess of imports over exports, will touch 3.1% of India’s GDP, up from 1.2% last year.
In addition, the pick-up in economic activity leading to higher merchandise trade volume has resulted in a surge in short-term trade credit, which jumped about a fifth during the year.
As the US tightens monetary policy to restrain inflation, outflows could only accelerate as leveraged investors lock in their gains.
“The US rate hike cycle is far from over, which in turn will keep global investors away from emerging markets such as India,” said Bhaskar Panda, executive vice president,
. “With a chunk of external debt maturing this year, the rupee is likely to remain under pressure, losing more value to the dollar.”
Forex Reserves Sliding
While the foreign exchange reserves are sufficient for the moment, the quantum has been sliding as the RBI sold $41 billion since February to cushion the impact of record portfolio withdrawals.
The reserves fell to $593.3 billion as of June 24 from a peak of $642.5 billion on September 3, 2021. Overseas funds sold a net of $30.67 billion of Indian financial assets until July 4 this year, show data from NSDL, a depository.
The foreign exchange reserves, which were more than 100% of the outstanding external debt in March 2021, have fallen to 97% in March 2022. Besides, the rupee has slipped by more than 5% against the dollar since the end of December.