The global economy seems to be heading towards a recession in the coming months. The recession factor ultimately makes the U.S. Dollar stronger against other currencies, including the Indian Rupee. Given the macro-economic outlook of the global financial crisis, the Indian Rupee is likely to bear more pain in the future.
The Indian economy struggles hard to recover over the past few months. Both consumer consumption and business injections have been extremely slow lately, which further discourages economists to see any sentiment on the INR recovery anytime soon.
On the other hand, some factors with an offset impact on the Indian economy might carry a little hope for the drowning Indian rupee. One such factor is the high level of Indian forex reserves. As an average estimate, Indian forex reserves amounted to a total of 482 Billion U.S. Dollars, as of March 2020.
Utilizing forex reserves as its defending weapon, the RBI seems to be efficiently managing the volatility element in the foreign exchange market. It strives its best to avoid the worth of the Indian rupee from declining amid any short-term shortage in the supply of the U.S. Dollar in the foreign exchange market.
The central bank injected a $2 Billion U.S. Dollar grant in March 2020 via forex swap. The decrease in the price of crude oil along with a slump in the prices of Brent crude oil futures by more than 46% raised some hopes for the INR back in March 2020.
However, the ongoing price war between Saudi Arabia and Russia does not seem to end soon. Therefore, the energy demand is likely to remain predictably impaired amid the global economic crisis.
Crude Oil Imports
India is dependent upon crude oil imports to meet 80 percent of its domestic demand. The surge in the price of crude oil amid the global economic crisis might even worsen the situation for the INR in the following years. The unfavorable import terms might exert a depreciatory pressure on INR. However, two factors might help INR in counterfeiting the deflationary pressure.
First, the United States’ fiscal and monetary policy might continue to exert downside pressure on the USD in the following years, offsetting the INR weakness.
The second factor is the anticipated intervention of RBI. Indian forex reserve stood around 579 Billion U.S. Dollars as of December 2020. They seem enough to offer an import cover to the country for more than 1.5 years. Therefore, the RBI might use forex reserves to prevent the excessive downfall of the INR. Hence, the derailing recovery of the INR might see a glimpse of hope.
Multiple factors affect the value of currencies, such as foreign and domestic trade activities, employment, foreign reserves, macro-economic policies, equity market performance, commodity prices, trade surplus/deficit, banking capital, and several other geopolitical factors. Indian Rupee is not an exception. Despite testing through hard times, economists still believe that INR will ultimately manage to strengthen.