Next step down? Phase manifold set for a weak rupee

And, given the RBI’s huge war chest – over $575 billion in foreign currency assets, plus $50 billion or so for further purchases – it should be well positioned to deter any attack.

Some time ago, I saw a set of forecasts for USD-INR—the range at the end of October was 73.50-75.50; For December-end, it was 73.50-76.00. My first thought was that since so many forecasters had pretty much the same point of view, if the view turned out to be wrong, a huge step could be taken.

And of course, threatening that, the rupee hit a low of 75.67 on 12 October; but with reserve Bank of India All guns blazing, it retrieved a little air. And, given the RBI’s huge war chest – over $575 billion in foreign currency assets, plus $50 billion or so for further purchases – it should be well positioned to deter any attack. But the question is whether he should fight this time or wait for a better time.

Oil prices have already crossed $85 a barrel and $100+ is much more than what is commonly discussed. In addition to staying on OPEC, the bigger—and possibly more sustainable—issue is the price of natural gas used for domestic heating in many countries in Europe. Gas is already five times more expensive than it was last year, and with shipping tankers in short supply, it will be difficult to import. Obviously, given the balance between oil and gas BTUs, oil will remain high as long as the gas supply remains tight.

There is another reason to believe that this problem may persist. The shift to green fuels, particularly in Europe, has structurally increased the demand for gas as the halfway house between oil/coal and solar/wind. Again, for the same reason, there has been a lack of enthusiasm for investing in non-renewable energy as it is clear that these investments will become obsolete in 25-30 years.

Now, oil prices are known to be an important determinant of the value of the rupee; So, if oil prices are likely to climb further by 20-25% and, more frighteningly, stay there for some time, there may be no point for RBI to burn its reserves at this level. Technically, below 76 appears to be an open abyss, and it has been over a year and a half for the rupee to set a new low – the last one was 76.78 in April 2020. Of course, a weak rupee and high oil prices will create even more difficulties for the people, which may soon become a big issue for the government with the state elections coming up soon. Perhaps, the apparently strong deficit position will enable the government to cut levies on petroleum products to ease the burden on the poor.

But, even if the government is able to – willing to do so, there is no hiding from inflation. Most analysts who have insisted over the past year or so that the price rise was temporary and will ease due to supply constraints are acknowledging that many price increases are likely to be more permanent. For example, I was shocked to learn that the dramatic shortage of truckers in the UK (and the EU) was because truckers’ wages had not increased in 25 years. As a result, most truck drivers shifted careers a long time ago; The pressure was not tolerated because there were always people from the poorer parts of Europe—Romania, Albania—who were happy to work for whatever wages they could get. Clearly, this cost escalation will be permanent and will be included in the cost of a wide range of goods.

Then, there is China. And while there is no doubt that China, under the rule of its governments, is slowing down, which will largely reduce demand for industrial materials, the reality is that most of them also have severe supply constraints, both Due to low investment and tightness of supply chain. Thus, it is unlikely that China’s slowdown will have a significant impact on global prices, whether for energy or other raw materials. The Fed and its sisters, apparently, have woken up to this and we will certainly see interest rates go up faster than expected; Which is not yet predictable how high they will rise. The RBI will eventually have to respond to rising global rates, but is likely to be reactive, especially with the government’s disinvestment program flourishing.

Thus, the stage for a weaker rupee is set manifold and, perhaps, it makes sense for the RBI to intervene after the rupee’s next move to save its powder.

CEO, Mekalai Financial
www.mecklai.com