Rupee crashes to lifetime low of 69 per dollar: What pushed unit to a record low and why does it matter to us?
The RBI will have to intervene and arrest the slide of the rupee. A crashing unit can erode investor confidence further
The Indian rupee has tested a new all-time low; the crash, past 69 a piece to the US dollar (69.10), should ring alarm bells in New Delhi.
Let’s look at the reasons for the freefall. The main villain in the story is crude oil - spiking international oil prices caused the rupee’s depreciation and everything else is linked to this. The rising trend of Brent crude, beginning last year, has widened the current and fiscal accounts putting immense pressure on the rupee.
CAD, which is the difference between the inflow and outflow of foreign exchange, jumped to $48.7 billion, or 1.9 percent of GDP, in the 2017-18 fiscal. That was higher than the $14.4 billion, or 0.6 percent of GDP, logged in the 2016-17 fiscal.
Secondly, worsening fundamentals prompted foreign investors to be choosy on emerging market investments and they have been on a heavy selling spree this year in the foreign exchange market. When foreign investors pull out, the local unit comes under pressure. When they pour funds, the rupee strengthens.
So far, Foreign Institutional Investors (FIIs) have pulled out Rs 469 billion from the Indian market (both equity and debt) causing the local unit to fall 8.24 percent this year from 63.84 to 69.10.
Thirdly, rising Federal Reserve interest rates have compelled investors to pull out of emerging markets and divert funds to the US. Two more increases are likely this year.
Brent crude was trading at nearly $78 a barrel in Asian trade on Thursday and until that trend reverses, there isn’t much hope for India, which relies on imports to meet about 80 percent of its domestic oil demand. The Narendra Modi-led government enjoyed cheaper global crude prices during the initial period of its rule, but oil prices started climbing later. In the recent past, prices spiked after the US asked its allies to end all imports of Iranian oil by November. Concerns over supply disruptions in Libya and Canada have also pushed prices higher.
A falling rupee is bad news for importers who will have to shell out more on their receivables; but exporters will earn more.
When the dollar supply dries up in the domestic market, a rupee sell-off begins from banks and oil importers to mop up sufficient dollars to meet their payment demand. This puts further pressure on the rupee.
The immediate challenge before the Reserve Bank of India (RBI) is to shore up the falling rupee. The central bank has been intervening in the currency market from time to time through state-run banks but the current fall seems to warrant urgent measures. The foreign exchange market is predominantly driven by speculators. Prior to Thursday's fall, the rupee tested an all-time intraday low on 24 November 2016 when it tested 68. 87 per dollar. With the rupee testing new lows and the oil scare persisting, RBI Governor Urjit Patel has a tough task with respect to salvaging the falling currency, a task similar to what his predecessor Raghuram Rajan faced in August, 2013, when the rupee had tested a low of 68.85 against the US dollar. Back then, the central bank, under Rajan, announced a series of measures to stabilise the free falling currency, including imposing temporary capital outflow curbs and incentivising inward remittances such as the FCNR deposit schemes, under which banks mobilised about $20 billion worth of deposits.
Those measures, coupled with the Rajab factor, worked well and helped calm nerves in the financial markets. This time, that task is with Patel and it is even more difficult to calm the markets now as the major trigger is the spike in the international crude oil prices, over which India has very little control.
Patel will have to pull some tricks to arrest the slide of the rupee as a crashing unit can erode investor confidence further, with a spillover impact on the local equity and the bond markets.
(Data from Kishor Kadam)
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