The rupee once again breached the 68-mark against the dollar this morning, hitting a low of 68.145 before gaining marginally. It is currently trading at 68.08, depreciating one per cent in less than a week. In fact, the Indian currency has fallen by 6 per cent against the greenback in 2018 so far and is one of the worst performing currencies this year across the world. Some experts do not rule out the rupee to weaken further to a new low to the psychologically key Rs 70 per dollar.
According to The Hindu, the behaviour of the exchange rate in May 2018 has been eerily similar to that in May 2013, the month that marked the onset of the 'taper tantrum' - when hints from the U.S. Federal Reserve that it was planning to taper its bond-buying programme saw the rupee slide by over 20 per cent against the dollar in three months till August. That was the time India was in the midst of its worst economic crisis since 1991, and the government intervened to buffer the rupee by introducing capital controls, restrictions on non-essential imports, and interest rate hikes. Though the report adds that the situation is not as dire this time round, but the following factors can fast change things for the worse:
Crude oil prices spiking further
The bad news is that the benchmark Brent crude oil price is flirting with the $80 a barrel mark, for the first time since 2014. According to Reuters, this has pushed up Asia's oil bill to $1 trillion this year, about twice what it was during the market lull of 2015-2016. The worse news is that some analysts have predicted it to hit $100 by the next year.
Given that India is the world's third largest oil importer, such a hike will inflate the import bill and disrupt the fiscal position. According to a recent Goldman Sachs report, India's current account deficit will be around 2.4 per cent of GDP in 2018-19, up from its previous forecast of 2.1 per cent. At the end of the first nine months of FY18, therefore, India's current account deficit (CAD) was pegged at $36 billion till December 2017, and is reportedly expected to increase to $48-49 billion for the full year. And as pointed out by Kotak Securities, a high deficit means the country has to sell rupees and buy dollars to pay its bills. This further reduces the value of the rupee.
According to the daily, May alone has seen Foreign portfolio investment (FPI) to the tune of $2.6 billion withdraw from India's stock and bond markets, and this could be a key factor precipitating the rupee's recent slide. Foreign equity investments take their cues from market valuations vis-a-vis peers, and the news is not good on that front. "We were, and still are sceptical of valuations accorded to some of the large-capitalisation stocks in India. Given India's premium to its historical multiples, and the country's relative valuation premium versus other EM economies, we expected a correction. While the correction has come about... it has been milder than expected by us, and we anticipate a reacceleration of selling during summer and the latter half of 2018," said Insight Provider ANTYA Investments Inc. on Smartkarma last month, adding, "The spread between one-year Indian G-SEC and the U.S. Treasury has declined approximately 50bps [since January]. After accounting for currency depreciation and transaction costs, a dollar investor generated zero return in the Indian debt market during the first four months of the current year. We estimate that prospectively foreign investors in Indian debt markets should expect zero total return this year. Moreover, our outlook is likely to deteriorate, before it gets better."
It does not help that the general elections are coming up next year - a time when most foreign investors go into fence-sitting mode.
In any case, with the recent truce in the US-China trade wars, the dollar is beginning to strengthen. According to Reuters, the dollar's index against a basket of six major currencies set a fresh five-month high on Monday, touching a peak of 93.860 at one point. The easing of trade tensions is likely to underpin riskier assets such as equities and bodes well for the dollar against the safe-haven yen, said Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore. That does not bode well for the rupee.
With agency inputs