Indian Rupee plunges to record low of Rs. 70.05 against the Dollar

The Indian rupee traded at record lows against the US dollar following concerns of a contagion from the plunge in Turkish Lira, a widespread decline in stocks across emerging markets and rising interest rates in the US.

 

The local currency traded at 70.05 per dollar, after recording its biggest single-day fall of 1.6% on Monday to 69.93 per dollar. Traders are reported to be betting light in view of India’s Independence Day holiday on Wednesday. Yet, under the nervous calm is a lingering concern the rupee may decline past 71 per dollar over the next few months. 

 

Weak support for the rupee comes from India’s widening current account deficit, including the critical non-oil, non-gold imports, lukewarm overseas portfolio investments, elevated global crude oil prices, and a sense of uncertain investment climate in the country. 

 

Emerging market currencies have been declining steadily this year. The Turkish Lira plunged 45% since 1 January 2018, Argentinian Peso 38%, Brazilian Real 15% and the Indian rupee 8.7%. 

 

The reasons for Turkish Lira’s plunge this year include a dispute with the US, its NATO ally for 60 years. The US had imposed trade sanctions over a political dispute and the two countries have so far been unable to resolve the dispute. Turkey is also resisting pressure to raise interest rates. Turkish Lira’s fall has had an impact on the currency and stock markets across the globe.  

 

Adding to the Indian rupee’s woes is its weaker than usual environment. India’s non-oil, non-gold merchandise deficit has increased steadily over the past four years. The deficit widened to $53.30 billion in the year ended 31 March 2018 compared with $17 billion in the year ended 31 March 2015.

 

Foreign portfolio investment in equity and debt is a negative Rs35,356 crore since 1 January 2018, compared with a net inflow of Rs20,048 crore in 2017 and Rs23,079 outflows in 2016, according to data posted on the website of National Securities Depository Limited (NSDL). 

 

Turkish Tensions 
Turkey has been benefiting from cheaper overseas inflows to fund its domestic economy, so far ignoring its elevated fiscal deficit of 5% and 15% year-on-year inflation rate. A plunging currency could make its situation worse.

Analysts recommend it should give up resisting raising local interest rates. Turkey will have to urgently take corrective measures with the US steadily raising its rates and likelihood of cheaper fund inflow drying up. Markets are concerned about the fact that any of Turkey could have a contagion effect with several weaker European economies getting hurt.

Impact on the Indian economy?
India is much less vulnerable to other emerging economies as the economy is gathering pace, as Kapil Gupta and Prateek Parekh and Akshay Guttani, Edelweiss Securities analysts said in a note.

If the global situation deteriorates, not only would exports slow down, but domestic liquidity too may dry up as the Reserve Bank of India (RBI) drains support the rupee. This, in turn, would hurt corporate de-leveraging and weigh on recovery.

Emerging Markets
Still, the impact on emerging economies has the potential of spiralling out.

"We see two potential channels of impact on emerging markets. First, capital flows to emerging markets could slow down as European banks retrench lending to them amidst heightened risk. Countries with high external debt and current accounts would be most vulnerable – such as South Africa, Mexico and Indonesia," the Edelweiss analysts said.

In a note, they said, "Other emerging markets too would witness tightening domestic liquidity and higher interest rates, which could hurt as domestic debt is elevated in several emerging markets and recovery is nascent. Also, strength of the US dollar could undermine global industrial activity and thus emerging markets exports, which is the main engine of growth currently. A softening stance by the Fed could help stall the contagion."

Courtesy: Moneylife