The rupee has had a historic week, with the currency dipping to all-time lows of 70.39, breaching the psychological 70 per dollar level. A sharp fall in Turkish lira was seen as one of the triggers for the global currency rout.
At the last traded price, the rupee slid 26 paise to close below the 70-mark for the first time against the US currency, hammered by a strong dollar demand amid growing concerns over widening trade deficit.
The Indian currency collapsed to a historic intra-day trading low of 70.40 before closing at a fresh lifetime low of 70.15 per dollar, down by 26 paise or 0.37 percent over the previous close.
Emerging market currencies and stocks remained in the investors' crosshairs as worries mounted despite fresh rally for the Turkish lira.
The lira continued to rebound from record losses a day after Qatar pledged $15 billion in investments to help Turkey's economy.
Headwinds in the form of widening trade deficit due to surging crude prices amid unsupportive global factors kept forex sentiment shaky and largely weighed on the local unit.
Country's trade deficit soared to a nearly five-year high of $18 billion, data released by the commerce ministry on Tuesday showed.
A massive exodus of capital outflows from both equity and debt market against the backdrop of the US Federal Reserve's anticipated interest rate policy is triggering wide panic, a forex dealer said.
Moneycontrol brings you five key reasons that are weighing on the currency.
Dollar strength
The currency has been witnessing a depreciation due to fast-gaining strength in the US dollar. The greenback has been gaining on the back of good economic trends as well as an environment of interest rate hikes. The dollar index has hovered around 96.6-96.98 levels, and analysts expect it to touch 100.
Recently, the Congressional Budget Office (CBO) projected the US economy to grow at 3.1 percent in this year. This, it said, is likely on the back of increased government spending and tax cuts. Additionally, it has been gaining strength on the back of prospective rate hikes as well. The US central bank previously held back on rate action but hiked during the June meeting. In fact, the commentary suggests two more rate hikes in the current year as well.
Turkey currency crisis
The turmoil in Turkish lira on the back of a diplomatic row, among other factors, is one of the reasons why the Indian currency is witnessing pressure as well. A fall in emerging market currencies as a result of lira could strain the rupee as well.
The Turkish currency has taken a hit owing to multiple factors such as big dollar debts, rising inflation, diplomatic row involving a pastor, lower interest rates and lack of adequate forex reserves.
Earlier this week, the lira slipped over 20 percent against the US dollar. The currency had been falling for some time now with and is down 80 percent against the US dollar for this calendar. Owing to the rapid depreciation, the lira has become one of the weakest currency in the world this year.
Domestic factors
The currency is likely to have experienced pressure on the back of some weak economic cues as well. For instance, India’s trade deficit in July came in at $18.02 billion, compared to $16.60 billion in June. A fall in imports led the deficit to a five-year low.
A fall in imports to $43.79 billion in July from $44.30 billion in June was offset by a contraction in exports to $25.77 billion in July from $27.70 billion in June.
High current account and fiscal deficits mean the central bank may have little room to tap into its reserves to defend the currency. Officials are said to have told PTI that India's crude oil import bill is likely to jump by about $26 billion in 2018-19 due to the rupee's fall, which could fan inflation worries.
Overvaluation in rupee
Experts were also worried about the high valuations in the rupee. They said that a combination of poor macros could weigh on the currency.
One expert, in a column for Moneycontrol, wrote that the RBI has depleted almost $24 billion till date to curb losses and volatility in the rupee. However, they are likely to intervene less aggressively if the yuan, lira and other EM currencies continue to depreciate. The endeavour of the RBI would be to manage the real effective exchange rate of the rupee (REER), preventing extreme overvaluation and to contain volatility by smoothening the pace of Rupee depreciation.
“..Additionally slow covers by exporters and panic covers by importers, FPI’s may trigger additional buying and trigger lots of stops above 70 levels. We maintain a view of further weakness in the Indian rupee and if we see the fundamentals deteriorating on the deficit front and on the fiscal side before elections then we could see the pair inching towards 72-73 soon,” Abhishek Goenka of IFA Global wrote.
Global tensions, crude trajectory
Another major factor weighing down the rupee is the ongoing trade turmoil between the world's two largest economies, the US and China, which continues to roil forex market sentiments. Having said that, recent reports of talks between the countries in late August could help it erase some losses as well.
“Moreover, abating foreign portfolio investor (FPI) outflows could contain weakness to some extent. While India remains the fastest growing major economy, a weaker rupee, stubbornly high inflation, elevated oil prices and global trade tensions pose the biggest downside risks to the economy,” Priyank Upadhyay of SSJ Finance & Securities wrote.
Source: moneycontrol.com