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  1. Indian rupee soon at 70? 5 key factors that dragged currency to record low

Indian rupee soon at 70? 5 key factors that dragged currency to record low

While analysts have reiterated that the rupee could further slide to the 70-mark against the US dollar if it breaches the crucial level of 69.30, we take a look at the key factors that led to rupee's decline today.

By: | Updated: July 20, 2018 1:18 PM
rupee volatility, rupee volatility index, foreign exchange reserves, foreign exchange, economy news Indian rupee soon at 70? 5 key factors that dragged currency to record low.

Indian rupee witnessed its worst fall in early trade on Friday, as it plunged to a record low of 69.12 against the US dollar. On Thursday, the rupee took a hard hit to close below the 69-level for the first time at 69.05, plunging 43 paise against the greenback. It marked the biggest single-day fall since May 29. While analysts have reiterated that the rupee could further slide to the 70-mark against the US dollar if it breaches the crucial level of 69.30, we take a look at the key factors that led to rupee’s decline today.

5 key reasons that dragged rupee to a low of 69.12 against USD

Strong US dollar: The US dollar surged to fresh one-year high on Thursday after the dollar had reached that high after US Federal Reserve Chairman Jerome Powell expressed confidence in the U.S. economy and affirmed expectations that the central bank was on track to keep hiking interest rates gradually. The dollar continued with its strength on Friday although it came down 0.1% to 95.071 after being knocked down from 95.652, its highest level since July 2017, according to a Reuters report.

Sliding Yuan: The Chinese Yuan fell to one-year lows, plunging to a level of 6.8128 to the dollar in the onshore market. Yuan’s weakness sent jitters across most of the Asian markets. “Major concern for the markets no doubt has been the falling Chinese Yuan. It fell by 1.50% yesterday, and almost 9% since mid-April this year. This can be an armoury taken by China to counter offensive and rising trade tariffs put across by U.S.,” Portia Advisory Services LLP said in a note.

Capital outflows: Data available with the National Securities Depository Limited showed that during the period January-July (till July 20), foreign portfolio investors (FPIs) have pulled out Rs 49,603 crore of investments from the domestic market. “We are witnessing global influencers affecting the rupee like dollar rise and yuan fall, even in the midst of crude retracing from its highs. Upto 31st May, we witnessed a net foreign funds outflow of $4.60 billion ($0.08 billion in equity and majorly $4.50 billion in debt),” Hiren Sharma, Founder and Managing Partner at Portia Advisory Services LLP, told FE Online.

Crude oil prices: Crude prices are on a rise, with crude oil futures edging higher by Rs 37 to Rs 4,627 per barrel on Friday. “Global investors have a view that due to crude rise, India’s current account will get affected directly, and so inflation will rise…. hence FPI’s have been selling off here,” Hiren Sharma said.

“Also, interest rate differentials have narrowed as the US has been busy hiking rates whereas India has been on pause (except last when it raised a token of 25 bps). So, Indian debt has become non-lucrative and so there have been more pull-outs on the debt side. Yuan has declined, the dollar has become dearer, and so it has affected the rupee directly. It has distorted the balance of payments for India,” Hiren Sharma said.

Political instability: The domestic political scenario is jittery with the opposition putting across a ‘no-confidence motion’ against the ruling Government. “Political tensions in domestic space weighted down the markets as a no-confidence motion against the ruling party is scheduled today… As Rupee breached the 69 mark, more weakness is expected while on flip side 68.2 will be a major level to watch,” Geojit Financial Services said in a note.

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