Dealers see rupee breaching the 67 level. Here’s why
Currency dealers think the rupee may continue to fall due to uncertainty over oil prices
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The rupee closed at 66.76 against the US dollar on Thursday. On Wednesday, it had fallen to an over 14-month low against the dollar. Currency dealers expect it to fall further and breach the 67 mark against the dollar.
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Why is the rupee falling?
A mix of domestic and external factors has made the fundamentals unfavourable for the rupee. The currency has been under pressure since early 2018, but it has intensified over a fortnight. The recent fall is due to the sharp rise in crude oil prices, which can potentially weaken India’s macroeconomic fundamentals. Jittery foreign investors are selling local equities and bonds, putting pressure on the rupee. Global sentiment is already cautious because of US President Donald Trump’s protectionist stance and threat of a trade war.
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What is the effect of higher crude prices?
India being a net crude oil importer, a rise in prices can affect the import bill and disrupt the fiscal position. Growth in imports has exceeded that of exports, causing a wider deficit. In FY18, merchandise trade deficit rose to $157 billion from $108 billion a year ago. This can lead to a higher current account deficit (CAD). Rating agency ICRA has estimated CAD rising to $46-48 billion in FY18 from $15.2 billion in FY17. This would mean India’s dollar requirements for imports would be higher than the total it earns from exports, leading to a weak rupee.
What does a weak rupee imply?
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It could hit companies which have dollar debt such as external commercial borrowings. If such borrowings are not hedged, the impact could be severe. It can increase costs for importers, who have already seen a rise in their finance costs after the ban on letters of undertaking. On the other hand, a weak rupee is seen as positive for exports.
What is the outlook?
Currency dealers think the rupee may continue to fall due to uncertainty over oil prices. Outflows from the bond and equity markets are also expected to continue. However, any weakness in the dollar can keep rupee depreciation in check. India’s adequate foreign exchange reserves, currently at a record $426 billion, may allow RBI to intervene in the market to cap extreme volatility, dealers said. RBI says it intervenes only to curb undue volatility.
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Why are outflows from Indian markets expected to continue?
A weak rupee lowers investment returns for foreign investors and prompts them to sell. Given the unfavourable view on currency and macroeconomic fundamentals, such outflows may continue. So far in 2018, foreign portfolio investors have bought $1.39 billion and sold $1.16 billion in equity and debt markets, respectively. Equity markets have seen net outflows so far in April. In the bond market, outflows are expected to be higher because of uncertainty over the inflation trajectory and interest rates.
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