Among the main reasons for the rupee’s weakness over the last few days is the dollar’s increasing strength; Bloomberg’s dollar index rose to the highest since June 2017 on Wednesday as higher-yielding assets tumbled.
The rupee on Thursday pierced the 70 mark against the dollar, ending the session at a lifetime low of 70.1575. In intra-day trade the Indian currency had slipped to a low of 70. 3950; the rupee has now lost nearly 9% since January. Currency markets on Thursday turned nervous after the government announced late on Tuesday that India’s July trade deficit had widened to $18 billion, the most in five years. Moreover, the deficit for June was revised to a higher $17.1 billion from the earlier $16 billion.
Economists now expect the country’s current account deficit (CAD) for 2018-19 to be around 2.7% of GDP, up from 1.6% in 2017-18. Among the main reasons for the rupee’s weakness over the last few days is the dollar’s increasing strength; Bloomberg’s dollar index rose to the highest since June 2017 on Wednesday as higher-yielding assets tumbled. The rupee has also been hit by the contagion effect of the steep depreciation of the Turkish lira and the accompanying fall in other emerging market currencies. There was no confirmation of any intervention in the markets on Thursday by the Reserve Bank of India (RBI).
Interestingly, foreign flows have turned positive in August — while foreign portfolio investors have bought equities worth $220.3 million, they have bought bonds worth $652.4 million. Between January and now, however, they have sold stocks worth $193.3 million and bonds worth $5.35 billion. While currency market experts had opined the rupee was depreciating primarily thanks to a rising dollar and would settle down soon, the latest trade data appear to have spooked the markets at a time prices of crude oil remain elevated. The yield on the benchmark bond also rose 4 basis points as bond markets were anxious the higher imported inflation — thanks to the weaker rupee — would drive up inflation overall, prompting the central bank to raise its policy rate. The RBI has raised the repo rate by 25 basis points each at its last two monetary policy meetings in June and August.