Rupee continues to slide against the US dollar, hitting its 15-month low on Tuesday. We uncover some of the reasons for this precipitous fall
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Thanks to the rapid jump of crude oil in the global market, and strengthening of the US dollar, the rupee is on a downward spiral. The Indian rupee fell to a 15-month low of 75.65 on Tuesday before it closed marginally higher at 75.52 against the US dollar.
However, the only good news is that the rupee is still higher than its all-time low of 76.87 against the US dollar that it hit in April last year. Rising crude oil prices and strong US dollar are seen to be the key reasons for the sliding rupee.
IFA Global Research Desk, in a report, stated that there are multiple reasons for the rupee’s fall. The first and foremost is the high oil prices that led to a record trade deficit of nearly $23 billion in September.
On Monday, London Brent oil hit its three-year high at $84.38 per barrel, while New York’s WTI crude surged to a seven-year peak at $81.72. OPEC's decision not to increase output further exacerbated global supplies.
The strengthening of the dollar has also put pressure on the Indian rupee.
“The rupee’s fall is not happening as a result of the weakening rupee but because of the strengthening of the dollar. The Chinese credit crisis and global fuel crisis are likely to hit emerging economies harder than others. There are fears of economic slowdowns, credit defaults and loan repayment delays to the IMF and other global lending agencies," says Vijay L Bhambwani, head of research, Behavioural Technical Analysis, Equitymaster. “This is leading to a flight to safety by way of buying dollars which is accepted as a global reserve currency."
Another reason for the rupee's fall is the dovishness of RBI in comparison to other central banks of emerging markets. “The RBI is therefore trailing other EM central banks as far as removal of exceptional monetary policy accommodation is concerned. This coupled with inflationary concerns makes India's real rates less attractive compared to some of other emerging markets," says the report
Finally, it is the asymmetric intervention by the RBI that led to the rupee’s recent fall. The rupee was overvalued and volatility was close to multiyear lows until a few weeks ago. Despite that, the “RBI has not intervened too aggressively by selling dollars," reads the report.
The experts predict the rupee to continue to fall if the dollar continues to get stronger. “The trend of the rupee remaining under pressure will continue as long as fears of economic slowdown remain because the dollar may witness continued buying," says Bhambwani.
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