New Delhi: The rupee fell to an all-time low of 69.09 against the dollar in early trade on Thursday, as a combination of factors including higher oil prices, a widening current account deficit and foreign portfolio outflows pushed the currency lower.
The Indian currency closed at 68.63 on Wednesday, a nearly 19-month low, with the previous all-time intraday low taking place on November 24, 2016 (68.86).
According to market estimates, the rupee has weakened by a little over 8% this year, making it the worst performer in Asia. Reuters reported on Thursday morning that traders were hopeful of the Reserve Bank of India (RBI) stepping in to prevent further losses in the currency.
Any impact on a currency is a function of vulnerability and shock, according to DK Joshi, Crisil’s chief economist.
“Though India is less vulnerable compared to 2013, the quantum and complexity of global shocks is much higher. Volatility is the only certainty in this environment,” Joshi said.
Why is this happening?
Market analysts The Wire spoke to pointed out that India’s external risks are seen as building up for two reasons. Firstly, higher oil prices are putting pressure on India’s current account deficit (CAD), which is expected to widen to 2.5% of GDP in FY’19.
Although this is still well below the 3% mark that is seen as troublesome, when viewed in combination with recent capital outflows, there are worries that India’s balance of payments could come under pressure.
As The Wire reported in May 2018, India could see permanent foreign currency outflow to the tune of $45 billion in 2018-19, a level not seen since 2012-13. Foreign portfolio investors have sold over Rs 45,000 crore in debt and equity so far this year, which is the most in a decade.
Nevertheless, Fitch Ratings noted earlier this month that the rupee’s depreciation is still more muted than what was seen during the 2013 taper-tantrum episode.
“India has better macroeconomic fundamentals than in 2013 and very low foreign ownership rates in the domestic government bond market, but the current account deficit has been widening as a result of rising oil prices, reviving domestic demand and poor manufacturing export performance,” the credit ratings agency noted in its global economic outlook