Rupee crashes to lifetime low of 69 against US Dollar

June 28, 2018 85 Views No Comment

Source: Reuters | Times News Network

The Indian rupee recovered marginally from its lifetime low to trade at 68.95 per dollar in late morning deals on Thursday (June 28) amid heavy month-end demand for the American currency from importers and banks.

In early trade today, the rupee fell to an all-time low tracking Asian peers, with weakening macro-economic fundamentals on the domestic front also weighing on the currency.

The dollar’s sharp gain overnight coupled with falls in Asian peers caused the drop in early trade, traders said, adding they were hopeful the central bank would step in to prevent further losses.

The rupee’s last record low was 68.8650 per dollar, hit on November 24, 2016.

The dollar was, however, steady against its peers on Thursday, having failed to extend overnight gains amid conflicting signals from Washington on a proposal to restrict Chinese investment as the bitter US-China trade row kept financial markets on edge.

On the domestic front, a widening current account deficit (CAD) due to higher global crude oil prices and steady capital outflows have weighed on the rupee this year.

“Weakening at this pace shatters confidence. Markets expect RBI (Reserve bank of India) to manage the currency more effectively. The pressure on INR is high, thus in the absence of major action from regulators, 70 levels can be seen,” the head of currency and debt trading at a foreign bank said.

“The RBI has been effectively managing (the rupee) over the years, and they do have ample firepower to manage sharp falls.”

Foreign exchange reserves stood at $410.07 billion as of June 15, latest RBI data showed.

Oil prices have been rallying for much of 2018 on tightening market conditions due to record demand and voluntary supply cuts led by the Organization of the Petroleum Exporting Countries (OPEC).

Economy’s March quarter CAD widened to $13.0 billion, or 1.9 per cent of GDP, from $2.6 billion, or 0.4 per cent of GDP, from a year earlier. Despite the rise in CAD, it remains modest relative to GDP and is largely financed by equity inflows, including foreign direct investment (FDI), Moody’s said in a note on Thursday, adding that the large foreign exchange reserves provided a good buffer.

“India’s low dependence on foreign-currency borrowing to fund its debt burden limits the risk of currency depreciation transmitting into materially weaker debt affordability,” Moody’s added.

Why rupee hit all-time low and what it means

WHAT MAKES A WEAK RUPEE

1) The slump in the currency has its roots in concerns over high crude oil prices. Oil prices in the global market inched up further with US crude futures rose $.23 to settle at $72.76 a barrel. Brent crude rose $1.31 to settle at $77.62 a barrel.

2) The currency market was nervous after RBI painted a gloomy picture of the banking sector in its bi-annual financial stability report.

3) Currency traders are also worried about the future of global trade against the grim backdrop of an escalating trade rhetoric between the US and China.

4) A massive selloff in domestic equities further added pressure fearing heavy capital outflows.

HOW A WEAK RUPEE AFFECTS YOU

1) While a weakening rupee will mean Indian exporters are left smiling, importers however, will feel the heat. According to latest government data, India’s trade deficit stood at $14.6 billion in May, 5.6 per cent higher than a year ago. A falling rupee will only widen this gap.

2) As imports, especially oil imports get costlier, it could translate into higher fuel costs, which will raise, or at least keep the pressure on the overall cost of economic activity. An inflationary pressure may add to Reserve Bank of India’s (RBI) woes and result in a further hike in key interest rates.

3) The erosion in rupee’s value has adversely hit the bond market too. The 10-year benchmark bond yield shot-up to 7.87 per cent from 7.83 per cent on Wednesday.

4) For those travelling abroad as tourists or Indians studying abroad, fall in rupee’s value would mean a higher cost of living.