The rupee plunged to an-all time low against the dollar on Monday, taking its losses to 5.7 per cent since the start of May. The rupee is now the worst performer in Asia over this period. It breached the previous low of 57.32 to the dollar on Monday and is trading at 57.54 against the greenback. Having a currency at an all-time low is not a great advertisement for the government's management of the economy ahead of elections.
Here are the reasons for the sharp fall in the rupee
- Dollar strength: The dollar index has been rising on signs of growing economic momentum and talk of an early end to the Fed's stimulus effort. Thio Chin Loo, senior currency strategist at BNP Paribas told NDTV that it's a general dollar rebound in markets this morning in the back of rising U.S. yields on Friday as a result of slightly better than expect payroll data in the U.S. The dollar is high across the board including the rupee, she added.
- Widening trade deficit: Rising deficit is bad for India as it exposes the economy to the risk of sudden stop and reversal of capital flows. In case of an event shock, for example if the U.S. Fed withdraws its bond buying programme, there might be sudden outward flow of money, leaving India scrambling for dollars. The slowdown in the Indian economy has made the current situation even more volatile because the government is unable to generate heavy capital inflow. India's current account deficit was equivalent to a record 6.7 per cent of gross domestic product in December.
- Weakness in domestic equities: Foreign institutional investors have been selling index futures in the last week. This is a hedging move as FIIs expect stocks (cash segment) to fall in the near term, traders said. FIIs have been a key support for markets (and the rupee) after buying over $15.38 billion (Rs. 90,000 crore) worth of shares this year as of last week.
- Rising import bill: Oil and gold imports account for 35 per cent and 11 per cent of India's trade bill respectively. Traders say there has been continuous demand for the greenback from oil importers, the biggest buyers of dollars in the domestic currency market, pushing the rupee lower. Similarly, falling gold prices have offset the government's and the central bank's moves to reduce gold imports, which increases current account deficit and weighs on the currency.
- Weak economic fundamentals: Moses Harding of IndusInd Bank told NDTV that weak economy and no signs of a quick fix solution are weighing on the rupee. The UPA government is unlikely to deliver far reaching reforms to generate heavy capital inflows, as it did last September to stave off the loss of India's investment grade credit rating, experts say.
(With inputs from Reuters)