Why rupee is in a free fall

THE CURRENCY HAS BEEN ON A WEAKENING TREND SINCE THE START OF THE YEAR

Indian rupee is facing a double whammy, one on the dollar front and the second due to internal factors. A resurgent dollar, which has gained 2.72 per cent so far in the year, along with rising oil prices, at their highest level since 2014, created bulging import bill, and therefore a wider current account deficit, which hit its highest level in 61 months in June, has resulted in weakness in the Indian rupee.

These factors along with outflow from emerging markets including India and plunging Turkish lira, which hit a record low, are exacerbating the free fall of the Indian rupee.

The Indian currency touched an all-time low of 70.855 (Dh3.68) yesterday, before trading 0.26 per cent higher to 70.775. The currency has been on a weakening trend since the start of the year and has lost more than 10 per cent, making it the worst performing currency in Asia.

“Rising crude oil prices have put a lot of pressure on the currency as India heavily relies on oil imports. Global political conditions, widening trade deficit of the country, sharp appreciation of the US dollar against emerging market currencies, are factors that are collectively impacting the Indian currency,” Sudhesh Giriyan, chief operating officer at Xpress Money, told Gulf News.

Giriyan expects the rupee to hit 72 against the dollar, and may see 20 level against the dirham.

But analysts feel that the Reserve Bank of India should let the market decide the desired level for the Indian rupee even as foreign exchange reserves continue to fall.

“Intervention on a continuous basis leads to reduction in Foreign Exchange Reserve,which is not desirable,” Y. Sudhir Kumar Shetty, president at UAE Exchange said. The RBI intervened in the market mildly after the rupee hit a record low the last time. The RBI is sitting on a forex reserve of $400.847 billion, which witnessed a fall in the week to August 17.

Saving grace

But Adeeb Ahamed, managing director at LuLu Financial Group expects the rupee to weaken to 71.10 against a dollar in the short-term, followed by recovery.

“In recent days, major currencies have lost considerably against the dollar on trade war issues. However, the recent development is quite favourable. A ray of hope is seen as fresh dialogue between the West and East have resulted in the recovery of a few major currencies. Currencies like the euro and pound could bounce back considerably,” Ahamed said.

Additionally, expected inflow of funds in Indian equities may give some cushion to a weaker rupee amid attractive performance of Indian equities, which have been hitting record high.

Meanwhile, the Foreign Institutional Investors (FII) withdrew Rs611 billion from Indian markets in the three months to June due to concerns over a trade war and expectations of a faster than expected rise in rates.

Turkey situation

The situation in India, however, is not akin to what exists in Turkey, but the impact is coming as both are part of the emerging market basket.

“That is true to some extent as we are not insulated from the rest of the world. Additionally, with rising crude prices, India’s macro is also facing some headwinds which need to be addressed. Every $10 per barrel rise in crude oil impacts the trade deficit by $9 billion or 0.3 per cent of GDP,” Lakshmi Iyer, CIO – Debt and Head – Products at Kotak Asset Management said.

Argentina’s peso has shed 82 per cent so far in the year, making it the worst performer in the emerging market space, followed by Turkish lira, which has shed 77.61 per cent so far in the year.

“The Turkey plunge made other emerging markets suffer, with Argentina’s peso the biggest victim of Turkey’s plight. Spanish banks are also at risk due to ties with Turkey, affecting overall gains in Europe. Many other EM currencies such as the South African Rand and the Indian Rupee have also come under pressure,” Mihir Kapadia, chief executive and founder of Sun Global Investments said.

The situation in India, however, is not akin to what exists in Turkey, but the impact is coming as both are part of the emerging market basket.