Rupee Falls to Record Low; Touches 69.09 against US Dollars
On 28th June 2018, the rupee hit an all-time low of 69.09 against the US Dollar. It is expected to depreciate even more.
The rupee’s last record low was hit on 24th November 2016 at 68.87 against US Dollars.
The currency has fallen about 7.5 % since the beginning of the year.
The INR is at a record low due to the following reasons:
- Capital outflows from equity and bond market: Overseas investors have pulled out nearly Rs 480 billion (Rs 48,000 crore) from the Indian capital markets in the first 6 months of 2018. It is the steepest capital outflow in a decade. This puts pressure on the value of INR.
- Interest Rate hike by Fed: The Federal Reserve has increased interest rates in the US. It is expected to raise the rate further in 2018. The rate hike implies that the US economy has recovered from the Financial crisis of 2008. The returns or yields from the US Treasury-Bills also increased. It is one of the reasons for the capital outflows. The investors decided to shift their capital from risky emerging market economies like India to the United States as Dollar is a safe haven.
- Increase in crude oil prices: The oil prices have been increasing. The Organisation of Petroleum Exporting Countries (OPEC) & Russia have decided to cut oil supply to increase the price. Also, the United States has issued a diktat to its allies to end all oil imports from Iran. (The US has pulled out form the Iran nuclear deal & imposed sanctions on Iran.) It will increase the demand for dollars as Iran allows India to buy oil in other currencies. India imports nearly 8.5 % of its total oil imports from Iran. This has led to an increase in oil price. The surge in prices affects India as India imports around 80 % of its crude oil requirements. Due to a higher import bill, the Current Account Deficit (CAD) has widened to 1.9 % of GDP in Jan-Mar 2018 from 0.4 % of GDP a year earlier.
- Trade war: Trade war has increased uncertainty in the world and will adversely impact India’s exports.
In spite of the decline in the value of rupee, Indian economy is not that vulnerable as it was during the ‘taper tantrum’ of 2013 when it was clubbed as one of the “fragile 5”. It is because India has stable macroeconomic indicators as compared to 2013. The Current Account Deficit (CAD) is modest at 1.9 %. The inflation in 2018-19 is expected to be around 5 %. India has accumulated huge Foreign Exchange (FOREX) Reserves as well. As per RBI data, India’s FOREX reserves stood at $410.07 billion as of June 15.
Even when the situation is not as dire as it was in 2013, the Indian rupee is the worst performing Asian currency. India’s imports will become costlier due to the depreciation. Hence, the current account deficit will increase. It also has the potential to increase inflation as the imports become more expensive.