Rupee's Fall Halts Against US Dollar. What Led To The Currency's Decline. Five Reasons To Know

The Indian rupee closed higher at Rs 68.46/47 against US dollar on Friday. The Indian currency pared some of the losses it incurred on Thursday, and rose from its record closing low in opening trade today and ended on sharply higher note. Rupee hit an all-time closing low of 68.79 on Thursday against the earlier closing low of 68.73 on November 24, 2016. The Indian rupee, which strengthened 5.96 per cent against the US dollar last year, has been on a general downtrend since April this year.
The crude oil prices play an important role in local unit's price since India meets its over 75 percent of oil requirements through imports. There are, however, mostly related factors that have not only caused but expedited the downfall of India rupee in this year.

"Weak global cues and rising oil price continued to impact domestic market sentiment while rupee declined to all time low amid concern on inflation and current account deficit... Any intervention from RBI to contain the volatility in rupee and progressing monsoon will provide some respite to domestic market in the near term," Vinod Nair, Head of Research, Geojit Financial Services Ltd.

"The Indian rupee fell to a lifetime low today due to several factors like rising dollar and crude aided by a wider current account deficit and continuous outflow from FIIs (Foreign Institutional Investors) pushed the currency lower," said Rahul Sharma, senior research analyst at Equity99, adding that FIIs have sold over Rs 40,000 crore in debt and equity so far this year.

Five Reasons That Are Causing Rupee's Fall

Crude Oil prices: The crude oil prices have risen for nearly 40 percent in past one year, reported Reuters. US crude prices hit a three-and-a-half year high on Thursday. Unplanned supply disruptions from Canada to Libya and Venezuela have propped up crude oil prices. West Texas Intermediate (WTI) crude futures rose 69 cents, nearly 1 percent, to settle at $73.45 a barrel. It reached $74.03 earlier in the session, the highest since November 26, 2014. Brent crude futures rose 23 cents to settle at $77.85 a barrel, reported Thomson Reuters.

Iran factor: A major factor causing crude oil prices to rise is US president Donald Trump's demand that its allies stop oil imports from Iran starting November. After this, the market witnessed supply concerns that could cause a large drop in crude exports from Iran. US President Donald Trump in May said his administration was withdrawing from a 2015 deal between Iran and six world powers aimed at curbing Tehran's nuclear capabilities in exchange for the lifting of some sanctions.

Strength of US dollar: Indian rupee's fall is as much reflection of rupee's weakness as it shows the strength of American currency. As US debt yields rise higher, the value of US dollar gets an edge, underpinned by the two likely interest rate hikes next year. Globally, the dollar was trading near eleven-month high against a basket of the other major currencies. The dollar index, which measures the greenback's value against basket of six major currencies, was up at 95.05, reported PTI.

Widening current account deficit: The current account deficit (excess of imports over exports) of March quarter widened to $13 billion or 1.9 percent of GDP against the $2.6 billion of 0.4 percent of GDP, from a year earlier. When imports soar over a period of time, the local currency suffers a setback since the import payments are made in the foreign currency, weakening the domestic currency further.

Weakness of emerging market (EM) currencies: US Federal Reserve raised its interest rates recently, giving a boost to the investor sentiment in the US markets amid the growing interest rate regime after a decade of low of low interest rates that had started the capital inflow into emerging markets. Now when the US interest rates start rising, the FIIs (foreign institutional investors) have a reason to leave the EMs for US markets. As a result, not only Indian currency, but other emerging markets currencies have declined in past. The Chinese yuan eased about 0.15 percent to a more than five-month low against the dollar on June 22. The Philippine peso has also been falling, and is among the worst performer amongst its peers this year, reported Reuters. South Korean lost about 1 percent past week.

So far this year, foreign investors have sold a combined USD 7 billion in equity and debt markets in India, reported PTI.

However, the experts believe that the rupee fall might not stay for long since the decline is primarily attributed to the crude price hike, which might get arrested as the OPEC members on June 22 agreed to raise output from July by about 0.6 to 0.8 million bpd. Besides the current account deficit figure might be alarming if compared with the previous year's figure, however, it is moderate in relation to the GDP data. (With inputs from PTI, Reuters)