Mumbai: The rupee on Thursday pared losses after falling past 69 per dollar for the first time as state-run banks sold the greenback on behalf of the Reserve Bank of India, according to traders. “State-owned lenders sold dollars, probably on behalf of the central bank," said Mumbai based currency dealer on a condition of anonymity. Rupee ended at 68.79, down 0.23% from previous close of 68.63. This was the fourth consecutive sessions when the currency closed lower.
During the day, it hit an all time low of 69.09 a dollar due to further surge in crude oil and sell-off in emerging currencies market amid escalation of trade war between US and China.
India is the world’s third largest oil importer and any spike in crude inflates import bill and disrupts fiscal position. This also accelerates inflation and gives less room to Reserve Bank of India to cut interest rates.
According to Dushyant Padmanabhan currency analyst at Nomura in Singapore, every rise in $10 a barrel in the prices of oil widens the fiscal deficit by 0.1% of gross domestic product and consumer price inflation by 0.6-0.7 percentage point.
Global crude oil prices are surging from the last few sessions after the US asked its allies to end all imports of Iranian oil by a November deadline and said it didn’t want to offer any extensions. Crude hit $78 a barrel on Tuesday.
The rupee was also under pressure due to drop in Asian currencies, with Chinese Yuan sliding for the 10th straight day, its longest losing streak since March 2014 after ongoing trade war between world’s two biggest economies. Trader fears that US-China trade war may evolve into a currency war.
Domestically, continued outflows by foreign investors due to fears of fiscal slippage for the year amid surge in crude oil prices and expectations that government may adopt populist measures ahead of the general election next year weighed the rupee. So far this year, FIIs sold a combined of $7 billion in equity and debt market.
The withdrawal by foreigners made the rupee the worst performing currency in Asia, following which analysts started predicting bearish forecast. Rupee has plunged over 7.3% so far this year, followed by the Philippine peso and Indonesian rupiah—down 6.7% and 4.3%, respectively. The Chinese yuan has depreciated 1.6%.
“We think rupee can continue to depreciate if global emerging market sentiment remains weak; the 69-70 range is not out of the question," Padmanabhan added.
Barclays Plc predicts the currency at 72 by year-end, while DBS Bank Ltd sees 71 to a dollar by June 2019.
“Unlike 2013, current pressure on currency is emanating from multifold developments in external macro fronts, where role of emerging market central banks is limited .We have to wait for automatic stabilisation like very strong USD or high yields start impacting them adversely," said Soumyajit Niyogi, associate director at India Ratings and Research Pvt. Ltd.