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Rupee Hits 7-Month Low against Dollar: Should You Worry?

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Rupee Hits 7-Month Low against Dollar: Should You Worry?
The Indian rupee fell 2.1 per cent in September 2014 in its worst monthly decline since an 8.8 per cent plunge in August 2013. Though the rupee is still up 11.5 per cent since its record low of 68.85 per dollar in August 2013, the recent weakness has led to doubts about the future trajectory of the currency. On Wednesday, the rupee slipped to a seven-month low of 61.95 against the dollar. (Read the full story)

Here are 10 things to know about the current rupee weakness:

1) The rupee is not the only currency showing weakness against the dollar. Other international currencies such as the euro and yen are also struggling. The yen is trading at a six-year low against the dollar, while the euro is at a two-year low.

2) Reserve Bank Governor Raghuram Rajan on Tuesday denied speculation that it was selling dollars to support the rupee. "In recent weeks, what has been happening is the dollar has been appreciating against other currencies, therefore when we look at our reserves in dollar terms, they have been coming down," he said. (Watch)

3) Unlike August 2013, the current weakness in the rupee is not because of domestic factors. The rupee is down because of sustained dollar strength. The greenback has gained more than 7 per cent against a basket of major currencies over the past three months.

4) The dollar is rising because of improving economic data in the US. GDP growth in the US jumped to 4.6 per cent (versus a contraction of 2.1 per cent in Q1) year-on-year in the June quarter. New home sales are up, consumer confidence is high and manufacturing and services sectors indicate a recovery in the world's largest economy.

5) Improving economic situation in the US has led to concerns that the Federal Reserve will start raising interest rates soon. According to Fitch, the US central bank will complete the 'tapering' of its asset purchase programme in October and the first increase in the Fed's short-term policy interest rate should be expected in mid-2015.

6) Dr Rajan says rising rates in the US will constraint the RBI's elbow room as India is highly integrated with global capital market. Higher rates in the US will narrow rate differential (with India) and may result in a reversal of portfolio flows creating pressure on the rupee.

7) The rate differential will further narrow if the RBI cuts interest rate to boost domestic growth. However, the central bank says it will cut rates only if inflation subsides to 6 per cent by 2016. Economists expect a rate cut in fiscal year 2015-16 now.

8) The RBI can remove sharp fluctuations in the rupee by broadening the currency market and by allowing different kind of players, currency expert Jamal Mecklai told NDTV. India's currency market is closed for foreign investors, which limits liquidity. Only bankers, importers and exporters can trade in currency market through currency dealers.

9) However, analysts are confident that the rupee will not break the 58-62 range in the medium term. According to Jyotivardhan Jaipuria of Bank of America Merrill Lynch, a sharp reduction in current account deficit, higher import cover and increased foreign direct investment (FDI) will support the currency.

10) India's current account deficit is seen at 1.7 per cent of GDP in FY15 (from a peak of 5 per cent in FY13), while the import cover has improved to 8.5 months. Reform measures by the Modi government should lead to higher FDI in India, Mr Jaipuria added.

(With inputs from Reuters)

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