The Indian rupee dived to a fresh six-and-half-month low in morning trade on Thursday, as several factors continued to drag the domestic currency. The dejection in the forex market added a jitter among the market participants as worries of fund outflows from domestic capital markets continued. The expectation of a possible rate hike by the US Federal Reserve in December and unwinding of its stimulus measures also contributed to the weakening of the sentiment. The rupee extended losses on Thursday, tripping 17 paise to hit 65.89 against the US dollar in the forex market today. The Indian rupee is also reeling under pressure because of the increased buying in the safe-haven assets such as gold and yen.
Though rupee quickly recovered ground from its early losses, it was still trading at its six-month low. It was up 10 paise from its previous close at Rs 65.62 against US dollar. Yesterday, the rupee plunged by a whopping 27 paise to end at Rs 65.72 per unit dollar. This was the weakest closing since 14 March, when it settled at Rs 65.78 against the dollar. The latest foreign exchange reserves data is due for tomorrow, last week it surged by USD 1,782.5 million as on 15 September to USD 402.5 billion. We take a look at eight reasons why rupee depreciated to a fresh six and half month low.
Appreciating US Dollar
The fourth consecutive gain in the US dollar triggered rupee to fell further. A rise in US Treasury yields encouraged investors to trim their short bets. The dollar climbed to a one-month high against a basket of currencies and is on track to post its best weekly performance this year on hopes that US President Donald Trump’s administration may be making progress on tax reforms. The dollar was trading 0.24% higher against a basket of currencies. It has gained 2.5% since hitting a 2 1/2-year low of 91.35 in mid-September.
Plunge in crude oil prices
The sharp fall in the crude oil prices is hurting the rupee sentiments. Oil prices fell on Thursday, with US crude giving up some of the previous session’s gains that were driven by a surprise fall in inventories, while Brent crude moved further away from recent 26-month highs. US West Texas Intermediate crude (WTI) dipped 22 cents, or 0.4% to $51.92 a barrel after rising 26 cents in the previous session to just below a five-month high. Crude oil prices are on a likely up move since the major slump as it fell to a level around $30 a barrel in early 2016 but are facing a blow nowadays.
The FPIs (foreign portfolio investors) are pulling money away from Indian stock market continuously as they had sold Indian equities worth close to $1.07 billion in September so far, after offloading stocks worth nearly $2 billion in August. Foreign investors and funds remained in exit mode due to geopolitical concerns and a tendency to take profit. Since Friday last week, foreign investors sold shares worth $850 million (approx). Foreign investors also didn’t spare regional equity markets even as they have sold shares worth about $2 billion in Taiwan this month, $1 billion South Korea, and $700 million in Indonesia.
US Federal Reserve concerns
The US Federal Reserve reaffirmed its intention to hike rates in December and normalising its crisis-era stimulus programme into reverse from next month last week and since then the dollar has been under pressure. Hardening speculation of widening fiscal deficit after the government indicated a stimulus package meant to jump-start the nation’s ailing economy put trading mood into further disarray.
Fiscal deficit disquietness
There is an increased speculation over a possible fiscal stimulus which can go above Rs 40,000 crore after six successive quarters of a dip in the economic growth. The weakness in the domestic currency might also be attributed to the expected risks of the widening of fiscal deficit after which finance minister Arun Jaitley said the government is mulling to announce measures to revive economic growth.
Sinking Asian currencies
Asian currencies are also under pressure of the strengthening of US dollar. A majority of Asian currencies took a beating on Thursday after US President Donald Trump’s proposal for a tax overhaul lifted the dollar and US bond yields, reducing the appeal of regional currencies. The dollar index, which measures it against a basket of six major currencies, climbed to a one-month high of 93.575, while the US 10-year Treasury yield rose to its highest since 13 July at 2.3425%. The South Korean won, the Thai baht, the Taiwan dollar and the Indonesian rupiah all declined about half a percent or more on Thursday. The South Korean won, the Indonesian rupiah and the Indian rupee broke the supports at their 200-day SMA (simple moving averages) this week, while the Singapore dollar breached its support at 50-day SMA. The dollar rose to 113.09 yen from 112.82 yen on Thursday.
Slump in Indian stock market
The key equity indices Sensex and Nifty extended yesterday’s losses and plummeted on Thursday. Over the course of five trading sessions since Friday last week, BSE Sensex has lost over 1,200 points to a nearly three-month low of 31,081.83 points, its lowest level since 30 June. The geopolitical tensions in North Korea and continuous FII (foreign institutional investors) outflows led to nervous moments following derivatives expiry on Thursday.
GDP under pressure
The GDP expansion hit a three-year low of 5.7% in the April-June quarter with India losing the fastest-growing economy tag to China for the second straight quarter. Besides falling GDP growth rate, exports are facing strong headwinds and the industrial expansion hit the lowest in five years.