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Is the worst over for the rupee?

Author: Bharath Sunnam/Wednesday, July 4, 2018/Categories: Currency

Is the worst over for the rupee?

The Indian Rupee recorded its all-time low on June 28 at 69.25, making it the worst performing currency in Asia in 2018.

Global trade tensions coupled with a surge in crude oil prices to a three-and-half-year high added to the losses. India being the third largest oil consumer, importing nearly two thirds of its oil requirement, made the rupee more vulnerable.

Sharp rise in crude oil prices widened the Current Account Deficit (CAD) to 1.9 per cent of GDP, which is expected to widen further to 2.5 per cent by the end of FY2019. Widening CAD, at a time when global central banks have started trimming down their balance sheets, is also making the rupee depreciate.

Another blow to the rupee came from outgoing foreign capital which failed to fill the deficit gap. Foreign investors have withdrawn more than Rs 46,000 crore in 2018 from domestic equity and debt markets, which is highest in a decade. This has made the rupee depreciate more than 8 per cent this year. Rising US treasury yields and the US Federal Reserve hinting at further rate hikes in the year coupled with the ongoing global protectionism policies, fresh capital inflow into the Indian markets in the near term looks minimal.

Although data with the Reserve Bank of India (RBI) suggests that the dollar reserves are sufficient for at least another 10 months of import payments, an intrusive RBI intervention is not expected under the current liquidity conditions. With no change in input variables for rupee depreciation, the Indian currency is expected to be sensitive to the above factors and continue to remain weak, but with limited downside.

The author is a fundamental research analyst at Karvy Forex and Currencies Pvt Ltd

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