The new 2000 Indian rupee banknotes. Photo: Reuters/ Mukesh Gupta
The rupee has gyrated between weakening and strengthening against the US dollar this year. Photo: Reuters/ Mukesh Gupta

The rupee, which has gyrated between weakening and strengthening against the US dollar this year, is expected to decline again as India’s pandemic-hit economy bounces back, and demand for imported goods for both consumption and production rises.

Sales of cars and utility vehicles in September rose 35% year-on-year, and 37% over August. Tata Motors recorded its highest monthly sales in eight years. Most other car companies posted similar performance numbers, indicating strong demand. Total cement dispatches in September rose to 5.21 million tons compared with 4.27 million tons a year earlier. Some other sectors are seeing a similar trend.

“If the increase in sales across sectors is any indication, the economy seems to be on a recovery path, which will also mean a jump in imports,’’ said Krishnamoorthy Harihar, treasurer at First Rand Bank in Mumbai. “The rupee could begin to weaken from the current levels. Even the regulator would prefer a weaker currency to support exports. ‘’

Still, it is not yet clear whether the increase is due to fresh demand that could sustain and power the economy or just pent-up demand from the lockdown months. Growth in bank loans remains muted at 5.3% for the six months to September 11, indicating low demand due to both individuals and banks being averse to risk.

“On the fundamentals and economic indicators available now, the rupee could weaken up to 74.50 per dollar by the year end,’’ said Harihar. The rupee is trading around 73.40 per dollar. Some forecasters believe the rupee could decline to 78 per dollar by February 2021.

The currency last week strengthened the most it has in six months to 73 per dollar.

In April it weakened to almost 77 per dollar following India’s draconian lockdown, which froze all movements and most economic activities. Exports and imports were also severely impacted, with volumes shrinking significantly.

But spending on some items that consumed large amounts of foreign exchange also shrank, conserving the nation’s dollar holdings. This and an increase in portfolio investments in listed and unlisted companies, real estate and other projects attracting foreign direct investment brought in large amounts of dollars, helping the rupee to bounce back and strengthen.

Crude oil, the single biggest import, cost India more than $100 billion in the year ended on March 31. The lockdown and the subsequent decline in consumption coupled with a plunge in global prices helped reduce India’s need to utilize its foreign exchange reserves. Analysts estimate the oil import budget will fall by about 8.7% during the current year from April 1.

India, the world’s third-largest consumer of crude oil after the United States and China, imports more than 80% of its annual crude oil requirement.

Global travel restrictions and sporadic lockdowns pushed crude oil prices down to historic lows. That also helped reduce foreign currency demand and spending. Rating agencies estimate that for every $1 drop in crude oil prices India could save $1.5 billion each year.

Plunging stocks prices attracted overseas investors, many from the US and Europe, where the cost of borrowing money is close to nothing. Foreign portfolio investors (FPI) who sold $8.35 billion of stocks and almost $16 billion in bonds in the March lockdown panic began ramping up investments in local equities soon after.

Foreign portfolio investors have invested $10.44 billion in equities since April 1. Investment by overseas investors in local stocks also helped stabilize the local currency. Unlisted companies including Reliance Jio and Reliance Retail attracted an estimated $20 billion, lifting the rupee. Reports also suggest there have been significant private equity investments in real estate projects.

Overseas funds however avoided investing in local bonds, mainly because of the high cost of hedging currency exposure, which negated the attraction of interest rate differentials between India and the US.

Some currency analysts say the central bank let the rupee gain initially up to 73 levels to rein in local inflation but later began buying greenbacks to prevent further appreciation as well as boost its foreign currency reserves. India has foreign exchange reserves of about $540 billion, enabling it to meet any repayment demands.

The rupees injected by dollar purchases into the local market could also come in handy if the government has to sell more bonds to fund increased budgetary demands, say economists.

The Reserve Bank of India’s Monetary Policy Committee is meeting on October 7 and October 8. The central bank will give its assessment and outlook on the economy and interest rate guidance on October 9. It could be the event India’s currency and bonds market will be looking to next for direction.