The Indian rupee, which hit its lowest in 15 months against the U.S. dollar on Monday, is expected to depreciate even more.
The weakened currency signals potential troubles for Asia’s third-largest economy amid higher oil prices and rising interest rates in the U.S., analysts said.
India’s current account and fiscal deficits mean the central bank may have little room to tap into its reserves to defend the currency.
The Indian rupee, which strengthened 6.75 percent against the U.S. dollar last year, has been on a general downtrend since the start of 2018. The currency on Monday hit its lowest in 15 months to trade at 67.13 rupees against a dollar — that’s a 5.15 percent fall for the year so far.
India’s growth slowed in 2017 because of the surprise demonetization, the introduction of a Goods and Services Tax and mounting bad debt in the banking sector.
Those problems have taken a back seat, but the recent rise in oil prices now threatens to widen the country’s deficits at a time when government spending has increased.
India is a net importer of oil and every $10 per barrel increase in price could worsen its current account and fiscal balances by 0.4 percent and 0.1 percent of GDP, respectively, Nomura analysts estimated. That could shave around 15 basis points off the country’s growth, the analysts wrote in a note.
A weaker rupee and higher oil prices will cause inflation to accelerate, which may prompt the Reserve Bank of India to hike interest rates earlier than expected.
But not all is lost for the rupee and India’s economy, according to analysts at Malaysian lender Maybank. The RBI said economic activity could accelerate given signs of rising capital expenditure and improving global demand, which would help the currency to stabilize