The rupee has extended its weakness and positioned itself as the worst performing currency in Asia in 2018. Continuous foreign capital outflow failing to fill the gap created by excessive imports over exports has made the dollar more demanding in the domestic market.
Almost every currency with an underlying large current account deficit has taken a hit as global investors remained cautious. The lack of plan of the RBI on repaying the $222-billion short-term debt maturing by March 2019 has further weakened the rupee.
With no major change in the domestic economy, the current weakness in the Indian currency is largely coherent with global factors. The Real Exchange Effective Rate (REER) index, which compares the performance of the rupee with six other global currencies, shows that the Indian currency has enjoyed overvaluation in the recent years as foreign investors infused more than 2 lakh dollars in 2017 coupled with softer crude prices. The rupee has also remained higher than its counterparts in the REER index during months of June and July. As per the REER, the rupee could hit the 72-mark against the dollar in the near term which would mandate an RBI intervention.
The author is a fundamental research analyst at Karvy Forex and Currencies Pvt Ltd