Rupee hits 13-month low of 63.54 vs dollar: Key facts you need to know

Meanwhile, the RBI has been on a dollar buying spree to create buffer to deal with the US interest rate hikes

Rajesh Pandathil December 16, 2014 02:10:36 IST
Rupee hits 13-month low of 63.54 vs dollar: Key facts you need to know

The Indian rupee hit a 13-month low of 63.54 against the dollar today, which is the weakest level since 13 November 2013. The stock markets are also trading lower with the Sensex down 1.33 percent at 26,955.61 and the Nifty down 1.27 percent at 8,115.30.

Here are seven facts about the rupee's weakness:

1) The reason for the rupee's weakness is the dollar's overall strength. The US greenback has been gaining along with the decline of the crude oil prices in the global markets, which has triggered capital flight from riskier assets. The Russian rouble today rebounded after the central bank there raised interest rates sharply to 17 percent from 10.5 percent in order to stem a rout in the currency in reaction to the oil price slump. Crude oil prices are today hovering around $60.70 per barrel. The prices have fallen about 45 percent in 2014.

2) Another reason for the rupee's weakness is the increasing concerns about global growth. The falling crude oil demand is a signalling a prolonged global slowdown, which is rendering volatility to emerging market currencies. A fall in demand for oil would mean a fall in consumer spending. Foreign investors are thus taking flight to safer assets, thus giving nightmare to emerging market currencies.

3) Investors are also jittery ahead of the two-day meeting of the Federal Open Market Committee of the US Federal Reserve. At the meeting, the rate setting committee of the US central bank is expected to give a hint as to when the interest rates will be increased there. An increase in US interest rates will prompt foreign investors to pull out of emerging markets. The FIIs have pulled out Rs 2,138 crore from Indian equities over the last five trading sessions.

4) Today's rupee depreciation is also being attributed to a widening of the country's trade deficit. According to data released yesterday, trade gap hit an 18-month high of $16.86 billion in November. The country's total imports surged 26.8 percent year on year. Oil imports, meanwhile, declined 9.7, which was in the expected lines because of the global crude oil price fall. Non-oil imports were up about 50 percent. However, the reaction to the trade deficit may be kneejerk, considering the surge in non-oil imports points to a recovery in the domestic economy. "Core imports expanded for a seventh consecutive month in November. Prior to this, core imports had been falling consecutively since May 2012 (except a few months). Sustained growth in core imports in the past few months suggests that a nascent recovery in domestic demand may have begun," Crisil pointed out in a note yesterday.

5) The rupee is still better than other emerging market currencies. According to a report by brokerage firm Religare yesterday, the rupee has been one of the most stable currencies, depreciating by just 2.6 percent, 4.2 percent and 1.5 percent in three-, six- and 12-month period, compared with the average depreciation of 26 emerging market currencies of 6 percent, 8.7 percent and 9.5 percent. Global brokerage house HSBC in a recent note said the rupee will outperform its Asian peers in 2015. "The INR has outperformed the region, supported by strong portfolio inflows and reform optimism, while improving macro data also helped. This story should continue in 2015," it said.

6) But the currency will depreciate further before it gains ground. As Debopam Chaudhuri, Chief Economist, ZyFin Research noted recently, "With an expected rise in US interest rate regime, there is a high probability of a significant decline in demand for rupee from FIIs in the short run, leading to further depreciation. In this context, the RBI's decision to not cut rates may help reduce the volatility in exchange rate until India regains its position as a lucrative investment destination." Religare said given a strengthening US economy and weakening Eurozone/Japan, the dollar will continue to rally, pressuring emerging market currencies downwards, including the rupee.

7) Meanwhile, the RBI has been on a dollar buying spree to create buffer to deal with the US interest rate hikes. The central bank bought dollars amounting to $2.7 billion in the spot market in October 2014, with cumulative net purchases at $17.3 billion during the seven month period in the current financial year. "The forward long position increased to $10.2 bn from $8.4 bn in September 14 as the central bank continued to purchase dollars in the forward market to manage liquidity and stabilise the INR," the Religare note said.

Updated Date:

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