Indian Rupee hits an all time low against US Dollar

Rising crude oil prices, trade war concerns, strengths in dollar index and weakness in the emerging market currencies are some of the reasons that have managed to keep the rupee under the pressure and hence, it depreciated to 68.89 against the US dllar on Thursday morning. It is the very first time since 24th November, 2016 that the value has counted so low. Moreover, the rupee has breached 69 for the first time against US dollar.

“We expect the RBI to intervene aggressively around 68.80 – 68.85 levels to defend the currency. But if 68.86 level is taken out then we may see sharp depreciation in the rupee in coming sessions and it may move towards 70.00 – 70.50 levels immediately,” said Rushabh Maru – Research Analyst, Anand Rathi Commodities.

“India cannot remain immune when the dollar is strengthening globally,” said Manish Wadhawan, MD and head of fixed income, Global Markets, HSBC India. “India being a trade deficit country, it is natural to have a weakening rupee, especially when capital flows to emerging markets have slowed and oil is also firming up.”

“Like other EM currencies, rupee too has developed a strong depreciation bias due to the fast strengthening of the dollar index as the Fed has been steadily raising interest rates. On the positive side, the rupee’s weakness should aid our exports amid improving global growth outlook . India enjoys a good cushion of foreign exchange reserves and the RBI is in a good position to control heightened volatility in the currency.” said Rupa Rege Nitsure, group chief economist, L&T Finance Holdings.

A depreciating rupee affects the local economy in several ways.

One, it keeps the cost of oil imports relatively high. India imports more than 70% of its crude oil requirements. Oil prices tumbled more than four percent to a six-week low on Thursday as the US Federal Reserve’s gloomy economic outlook and disappointing China manufacturing data fuelled fears of a global recession and pummelled markets.

Two, it can affect the current account deficit – the gap between foreign earnings against expenses (exports against imports plus net transfer payments). A falling rupee increases import costs while increasing export revenues in rupee terms.

Three, it has the potential to fuel inflation throughout the economy at a time when headline inflation is still above 9%. Higher oil import costs could translate into higher fuel costs, which will raise, or at least keep the pressure on the overall cost of economic activity. That will add to the headache of the RBI, which has been struggling to contain inflation, even at the cost of sacrificing short-term growth, by raising interest rates.

Four,a declining rupee adds to the pressure on corporate margins through higher imported input costs. Higher local prices also add to costs.

Five,it affects foreign investments in stock markets. A plunge in the rupee – yesterday’s fall was the second biggest in history – effectively accentuates foreign institutional investors’ losses on their equity portfolios (because of foreign exchange value changes) and triggers stop-losses, which forces further sales, dragging markets even further down

Six, the biggest losers will be importers and oil marketing companies, which import their main raw material, crude oil. For nationalised oil marketing companies, the under-recoveries (losses from subsidising prices) in diesel, kerosene (through the public distribution system) and domestic liquefied petroleum gas will climb further.

(With inputs from ‘The Economic Times’, ‘Firstpost’ )

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