Rupee may fall further against U.S Dollar

The Indian National Rupee (INR) breached the 70 mark against the US dollar recently causing an immediate short term impact on the economy – imports became dearer particularly india’s outgo of rupee against the dollar for buying crude oil shot up but exporter got more Indian rupees in exchange for the same commodity they exported some months ago.

So the flip side and the right side had to be viewed in the right perspective to make an overall assessment on the economy particularly the current account deficit ( the difference in import costs and export earnings ) and the Fiscal Deficit .

Even since the crude oil prices breached 60 to 70 USD per barrel first due to the OPEC cut back of one million dollars per day which has since been relaxed, secondly the Iran crisis with US President Donald Trump reimposing sanctions on Iran on the nuclear program issue that prevented that oil coming into the market causing a shortage. All this has caused the imbalance in the money markets with investors panicking and pulling out of most markets including India.

Here is the  history. The rupee first breached the 67-mark against the US dollar to close at a 15-month low of 67.13. But stabilised at 67.14, following a surging demand for the dollar as Brent crude, an international benchmark, came within kissing distance of $76 per barrel.

 

According to a currency dealers, widely quoted in the India , huge dollar purchases by oil importing companies along with speculative activity largely weighed on the rupee. “FIIs continue to be net sellers in Indian equities, adding further pressure on the rupee. To this end, CPI release scheduled later this week will be viewed with interest. Market participants also watched the RBI’s recent move to conduct OMO [open market operation] to buy government bonds worth up to Rest 10,000 core on May 17,” said Anand James, Chief Market Strategist at Geojit Financial Services. Hardening concerns that an imminent Federal Reserve interest rate hike will accelerate capital outflows impacted trading mood further.

Foreign investors and funds pulled out over Rs 15,500 crore from the Indian capital market in April, making it the steepest outflow in 16 months, due to surge in global crude prices and rise in yields of government securities here.On Monday, key crude oil prices rose by 1 per cent to their highest levels since late-2014 to cross the significant $75 a barrel tag. It was boosted by Venezuela’s deepening economic crisis and the upcoming decision on whether the United States will re-impose sanctions on Iran. The US did pulling out of the nuclear deal dealing a severe blow to Iran to export oil. India already owes a huge amount of USDs to Iran for past purchased post the lift of sanctions era during the Obama regime. Now India cannot buy oil from Iran and defy Trumps actions Iran.

The sudden flare-up in global crude prices rattled the forex market sentiment in a big way, stoking concerns over widening trade deficit and higher capital outflows. As a forex dealer explained, India being a net crude oil importer, a sharp rise in prices can affect the import bill and disrupt the fiscal position. India’s current-account deficit, which has already widened to $13.5 billion in Q3 FY18, up 87 per cent over the previous quarter, is reportedly forecast to hit its highest level in six years in this fiscal, experts were quoted in the media as saying.

With fears mounting about a further fall in the rupee in the near term, exporters have cancelled their previously booked forward contracts and importers are rushing to cover their obligations, which have added to the negative sentiments, experts claim.

According to The Economic Times, India’s apex bank reportedly intervened in the currency markets on Monday to prevent a further slide in the rupee against the US currency – some state-owned banks were seen selling dollars aggressively and the RBI reportedly sold about $800 million collectively on the spot and exchange traded futures markets.

Incidentally, the RBI has fixed the reference rate for the dollar at 67.1060 and for the euro at 80.1179.

In the cross currency trade, the rupee dropped further against the pound sterling to close at 90.83 from 90.67 and slipped against Japanese Yen to finish at 61.42 per 100 yens as compared to 61.38 earlier. However, the local unit strengthened slightly against the euro to end at 79.97 from 80.00 previously, agency reports said.

After breaching the 67-mark against the US dollar on Monday, the Indian rupee slipped by 7 paise to trade at 67.20 against the USD. The fall is seen amid a surging demand for the dollar as Brent crude, an international benchmark for oil, comes within kissing distance of $76 per barrel. This is the lowest level for the Indian currency since February 2017 when it had ended at 67.19 against the US dollar.

But experts say that the worst is yet to come, predicting it to breach the 68-mark against the dollar, perhaps even the 70-mark. It has already depreciated 5.10 per cent since January, and has been the worst performer this year so far.

 

On the back of the growing fears about a further fall in the rupee in the near term, exporters have cancelled their previously booked forward contracts and importers are rushing to cover their obligations, which added to the negative sentiments.

 

The rupee, Asia’s worst performing currency, touched an all-time low of 70.09 against the dollar on Tuesday. The current turmoil in Turkey, triggered by US sanctions, had not affected the perception of India, Gard said. The flow of foreign portfolio investments (FPI) had not altered either and there had been no outflow in July, he added.

On how the rupee will be affected if China devalued its currency, Garg said that for the first time in the last 20 years, the Chinese economy had experienced current account deficit (CAD). “Now China’s exports and imports are altering fundamentally. So far, the depreciation of the Chinese yuan has not been so high. Even if the Chinese currency is devalued, India will not be affected as long as the depreciation of all currencies vis-a-vis the dollar was similar.” Rupee gains against dollar ahead of US-China trade talks

Today, the rupee was trading at 69.84 a dollar, up 0.48%, from its Thursday’s close of 70.16

So far this year, the rupee has weakened 9%, while foreign investors have sold $193.30 million and $5.35 billion in equity and debt markets, respectively. Photo: Mint

Reports from Mumbai, the main money market of India, says the Indian rupee along with Asian currencies strengthened against the US dollar on Monday over optimism that trade tensions between US and China will ease after planned talks due this week. The rupee was trading at 69.84 a dollar, up 0.48%, from its Thursday’s close of 70.16. The home currency opened at 69.83 a dollar. On Friday, currency markets were closed due to Parsi New year.

The 10-year bond yield stood at 7.836%, from its previous close of 7.861%. Bond yields and prices move in opposite directions.

Chinese and US trade negotiators will meet in Washington this week, with the aim of Presidents Xi and Trump meeting in November, the Wall Street Journal reported.

Traders also await the minutes of US Federal Reserve’s July meeting due to be released on 22 August. Benchmark Sensex Index rose 0.3% or 114.78 points to 38,062.66. Since January, it has gained 11.6%.

“If global currencies show further meltdown, the rupee will also fall further. It could touch 75 in the next 4 or 5 months,” a forex analyst was quoted as saying. The Sensex, however, ignored the rupee’s fall and gained around 245 points at 37,890. “The current drop in the rupee is mainly due to the crisis in Turkey. The dollar index has strengthened beyond 96 levels reflecting its safe-haven status due to the possible domino effect of the Turkey crisis on the other financial institutions.

The rupee can see a further dip to 70.25 levels. On the other hand, we could be seeing 69.60 levels if the favourable inflation data is backed by a moderation in the awaited trade deficit figures,” said Salil Datar, CEO & Executive Director, Essel Finance VKC Forex Ltd, reports said.

In a scenario, where inflation further goes up then there are chances that RBI may hike rates resulting your EMIs outflow, experts said adding the current low is also a bad news for students aspiring to study abroad, as lower rupee value will lead to higher education costs. Travelling to out of India will also become expensive.