The Indian rupee dropped to a fresh 6-month low on Tuesday over pessimism amid the forex market as the fears of fund outflows from the domestic capital markets weighed. We take a look at five reasons why rupee depreciated to a fresh six-month low.
The Indian rupee dropped to a fresh 6-month low in afternoon trade on Tuesday over pessimism amid the forex market as the fears of fund outflows from the domestic capital markets weighed. US Federal Reserve’s intention to hike rates in December and unwinding of its stimulus measures also added in the weakening of the sentiments. The rupee fell as much as 28 paise to hit a fresh six-month low of Rs 65.38 against US dollar in the forex market today. The Indian rupee is reeling under pressure because of the increased buying in the safe-haven assets such as gold and yen and the continuous strengthening of the US dollar against a basket of currencies.
The rupee faced with the heavy demand for the American currency from importers and banks, as foreign capital rushed out. Yesterday, the rupee had plunged 31 paise to close at a 6-month low of 65.1 after heavy buying of the US currency and concerns on the macroeconomic front. This was the weakest closing for the home currency since March 24, when it had ended at 65.41 against the US dollar.
In the meantime, country’s foreign exchange (forex) reserves surged by USD 1,782.5 million as on September 15, according to the latest RBI data. Total reserves were USD 402.5 billion, against USD 400.726 billion in the previous week. We take a look at five reasons why rupee depreciated to a fresh six-month low.
US Federal Reserve’s rate hike 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.
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.
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.
Foreign Portfolio Investors exit
FPIs (Foreign portfolio investors) sold shares worth Rs 2,491.18 crore since Friday last week, showed provisional data from the stock exchanges. Yesterday only, FPIs sold shares worth Rs 1,249.45 crore. Foreign investors and funds remained in exit mode as they have pulled out nearly Rs 5,500 crore from local equities so far this month due to geopolitical concerns and a tendency to take profit.
Slump in Indian stock market
The key equity indices Sensex and Nifty extended yesterday’s losses and plummeted on Tuesday. Over the course of three trading sessions since Friday last week, BSE Sensex has lost 915 points to a one-month low of 31,455.65 points. The geopolitical tensions in North Korea and continuous FII (foreign institutional investors) outflows led to nervous moments ahead of derivatives expiry due on Thursday.