The strengthening dollar, the rising price of crude, the Trump administration’s trade war and the sell-off by foreign portfolio investors roiled the rupee on Thursday, pushing it to a life-time intraday low of 69.10 to the greenback.
The rupee opened 15 paise weaker at 68.87 per dollar over the previous close and breached the 69 mark in early trade.
However, a reported central bank intervention (through the sale of dollars) helped the domestic currency pull back and end the day at 68.7950 against the previous close of 68.62. The rupee’s previous historic low was in November 2016, when it plunged to 68.86.
“If crude oil continues to be on the boil, the dollar extends its gains, the Trump administration persists with its policy of imposing new duties on imports, and US interest rates keep rising (which, in turn, will trigger outflows from emerging markets), the rupee could test 70 levels next month,” said a currency dealer with a public sector bank.
In tandem with the yuan
The dealer also pointed out that China has been depreciating its currency (yuan) to offset the effect of duties imposed by the US. The Indian unit also seems to moving in tandem with the yuan so that exporters don’t lose out.
In Thursday’s trade, the bid-ask spread widened to 1-1.5 paise from the usual 0.05 paise, indicating a (dollar) liquidity crunch in the market. “In the past week, volatility in the Asian markets has risen considerably, with a host of risk-off catalysts coming together to magnify the scale of correction. This has particularly been true for Indonesia and India.
“The rupee weakened past 69 to a record low on Thursday … As the regional underperformer, the rupee is down 7.4 per cent on a 2018 year-to-date basis…,” said Radhika Rao, Economist, DBS.
The RBI, in its Financial Stability Report, observed that increased domestic demand, along with a worsening of the terms of trade, particularly due to rising oil prices, may impact the current account, although robust global growth is likely to boost India’s exports.
Moody’s sees stability
Moody’s Investors Service said India’s large and relatively stable domestic financing base limits its external vulnerability, contributing to “the economy’s resilience by sheltering it from abrupt changes in external financing conditions”.
Moody’s elaborated that 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. “Although India’s current account deficit has widened, driven in part by the recent rise in oil prices, it remains modest relative to GDP and is largely financed by equity inflows, including foreign direct investment.
“India’s significant build-up of foreign exchange reserves in recent years to all-time highs provides a support buffer to help mitigate external vulnerability risk,” said the agency.