The rupee is literally on a free fall, as the currency finally breached the crucial 91-level-mark against the US Dollar. The Indian rupee fell by 36 paise in the intra-day session today, breaching the 91 marks. The rupee had opened at a historic low of 90.83 against the US dollar in early trade today.
As per a PTI report, the Indian currency slipped 1% against the greenback in the past five sessions alone. At 11:45 am (IST), the Indian rupee breached the 91-level mark and was trading at 91.14 against the US Dollar, down 36 paise from its previous close.
On Monday, the Indian rupee had hit a record low of 90.78 against the greenback. This year, the Indian rupee has been one of the worst-performing Asian currencies, having fallen by over 6% year-to-date, marking its maximum decline in three years.
The breaching of the 91-level mark is attributed to persistent outflow of foreign equities and lack of clarity over the India-US trade deal.
Let us know the in detail the major reasons for the breach
1. Lack of progress in India-US trade deal
While on Monday Commerce Secretary Rajesh Agrawal said that India is close to finalising an initial framework trade agreement with the United States, which would help reduce high reciprocal tariffs, the uncertainty around the finalisation of a trade deal still lingers.
“Let’s see what happens in the next few months,” Agrawal added, pointing towards the ongoing trade negotiations, adding that India is engaged with the US to see if they can finalise a trade deal “sooner than later”.
According to currency experts, a delay in the trade deal is keeping market sentiment weak. “With 50% tariffs on top of capital outflows, we cannot rule out the rupee sliding to 93 over the next two quarters,” a banker told Financial Express.
Further, Alok Singh, Treasury Head – CSB Bank, said that the rupee’s depreciation will only reverse with either deal announcements or fresh capital market inflows. “If that happens, I see the rupee below 90 by March,” he said.
2. Outflow of foreign equities
As per provisional data for December 15 available on the NSE, foreign portfolio investors were net sellers of equities worth Rs 1,468 crore in the Indian market, while domestic institutional investors purchased equities worth Rs 1,792 crore.
As per data from the stock exchange, foreign investors have pulled out $1.5 billion from equities in December. Also, as per data from the Clearing Corporation of India, the debt market has seen an outflow of Rs 8,846 crore.
The rupee’s weakness is being driven primarily by tariff-related concerns and foreign investor selling, not by a deterioration in economic fundamentals. “As long as these short-term imbalances persist, pressure may continue,” Reuters quoted Amit Pabari, Managing Director at FX advisory firm CR Forex, as saying.
“The current phase of rupee weakness appears more flow-led than panic-driven,” Reuters quoted India Forex and Asset Management as saying.
3. Mismatch of dollar demand and supply
As per a Reuters report, there has been a continuous mismatch between dollar demand and supply. The dollar purchases have been linked to the likely maturity of positions in the non-deliverable forwards markets.
Further, local corporations have been purchasing dollars to complete their year-end payments. Adding to this is the limited intervention by the RBI, which, as per reports, has stepped in to cap further losses but has not targeted any specific levels for the Indian rupee.“Traders are pushing the rupee lower and lower. The Reserve Bank of India (RBI) was expected to step in at 90.50 earlier, but we have already breached it, and there is no sign of settling,” the dealer added, a dealer at a public sector bank said.
Outlook for Rupee
Analysts had expected that the currency would breach the 91-level mark by this month end, however the breach came in nearly two weeks earlier.
Currency experts have cautioned that by next year end the currency is likely to trade near the 93-level-mark if the India-US trade deal does not materialise. The currency deprecation was not expected due to low trade deficit data.
Commenting on the currency movement, Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Investments said,
“ Further sharp weakness in rupee was not expected today since the November trade data has come better-than-expected. Covering of short positions may be a factor in today’s decline. Sustained FII selling is acting like a vicious cycle pulling the rupee down,”
Normally when rupee declines, the RBI intervenes by selling dollars to stem the decline of the rupee. But recently the RBI’s policy has been to let the currency decline. Low inflation in India ( 0.71% in November ) is the reason for this non-intervention by the central bank. Rupee depreciation is not hurting the economy, the analyst added.