Rupee continues its free fall against US dollar: Should India be worried?

Rupee continues its free fall against US dollar: Should India be worried?

The rupee yesterday breached the 67-mark against the US dollar to close at a 15-month low of 67.13. Today it is at 67.14, following a surging demand for the dollar as Brent crude, an international benchmark, comes within kissing distance of $76 per barrel.

After breaching the 67-mark against the US dollar on Monday, the Indian rupee slipped by 7 paise to trade at 67.20 against the USD. The fall is seen amid a surging demand for the dollar as Brent crude, an international benchmark for oil, comes within kissing distance of $76 per barrel. This is the lowest level for the Indian currency since February 2017 when it had ended at 67.19 against the US dollar.

But experts say that the worst is yet to come, predicting it to breach the 68-mark against the dollar, perhaps even the 70-mark. It has already depreciated 5.10 per cent since January, and has been the worst performer this year so far.

Why is the rupee depreciating?

According to a currency dealer, huge dollar purchases by oil importing companies along with speculative activity largely weighed on the rupee. "FIIs continue to be net sellers in Indian equities, adding further pressure on the rupee. To this end, CPI release scheduled later this week will be viewed with interest. Market participants also watched the RBI's recent move to conduct OMO [open market operation] to buy government bonds worth up to Rs 10,000 crore on May 17," said Anand James, Chief Market Strategist at Geojit Financial Services. Hardening concerns that an imminent Federal Reserve interest rate hike will accelerate capital outflows impacted trading mood further.

Foreign investors and funds pulled out over Rs 15,500 crore from the Indian capital market in April, making it the steepest outflow in 16 months, due to surge in global crude prices and rise in yields of government securities here.

On Monday, key crude oil prices rose by 1 per cent to their highest levels since late-2014 to cross the significant $75 a barrel tag. It was boosted by Venezuela's deepening economic crisis and the upcoming decision on whether the United States will re-impose sanctions on Iran.

"I will be announcing my decision on the Iran Deal tomorrow from the White House at 2:00 pm," US President Donald Trump tweeted nine hours ago. So the world will now keep a nervous eye on the clock since imposing sanctions on the world's fifth largest crude oil producer is sure to further tighten global oil supply.

Why is India worried?

The sudden flare-up in global crude prices rattled the forex market sentiment in a big way, stoking concerns over widening trade deficit and higher capital outflows. As a forex dealer explained, India being a net crude oil importer, a sharp rise in prices can affect the import bill and disrupt the fiscal position. India's current-account deficit, which has already widened to $13.5 billion in Q3 FY18, up 87 per cent over the previous quarter, is reportedly forecast to hit its highest level in six years in this fiscal.

On the back of the growing fears about a further fall in the rupee in the near term, exporters have cancelled their previously booked forward contracts and importers are rushing to cover their obligations, which added to the negative sentiments.

What is the RBI doing about it?

According to The Economic Times, India's apex bank reportedly intervened in the currency markets on Monday to prevent a further slide in the rupee against the US currency - some state-owned banks were seen selling dollars aggressively and the RBI reportedly sold about $800 million collectively on the spot and exchange traded futures markets.

Incidentally, the RBI has fixed the reference rate for the dollar at 67.1060 and for the euro at 80.1179.

Rupee versus other currencies

In the cross currency trade, the rupee dropped further against the pound sterling to close at 90.83 from 90.67 and slipped against Japanese Yen to finish at 61.42 per 100 yens as compared to 61.38 earlier. However, the local unit strengthened slightly against the euro to end at 79.97 from 80.00 previously.

With agency inputs