Rupee drops 4.25 per cent in three weeks, Reserve Bank keeps offhttps://indianexpress.com/article/business/market/rupee-drops-4-25-per-cent-in-three-weeks-reserve-bank-keeps-off-5928969/

Rupee drops 4.25 per cent in three weeks, Reserve Bank keeps off

While the Rupee lost 4.25 per cent against the dollar over the last three weeks, only two major emerging economies saw their currencies decline more than that.

Rupee among worst hit globally since US Fed rate cut; South African, Brazilian units top
Rupee among worst hit globally since US Fed rate cut; South African, Brazilian units top

After it fell 26 paise to close at 71.81 on Thursday, the Indian Rupee has now lost Rs 2.93, or 4.25 per cent, against the dollar in August. With this, the domestic unit figures among the biggest losers in the global currency market since the US Federal Reserve — while announcing its first rate cut in a decade on July 31 — stated that it was just a “mid-cycle adjustment”. The announcement took emerging markets by surprise as they earlier expected that a dovish stance would result in fund inflow in their respective countries.

While the Rupee lost 4.25 per cent against the dollar over the last three weeks, only two major emerging economies saw their currencies decline more than that. The Brazilian Real and South African Rand have fallen 5.56 per cent and 6.4 per cent respectively in the same period.

Another factor that led to a decline of emerging market currencies was a sharp decline of Chinese Yuan Renminbi on August 5, when it breached the 7 to a dollar mark as trade war fears grew further between the United States and China. The development hit the global market sentiments and led to decline in currencies. Yuan Renminbi has fallen 2.9 per cent in August and the Russian Ruble and Mexican Peso has lost 3.12 per cent and 3.04 per cent. By comparison, the developed market currencies have remained stable. While Euro gained 0.01 per cent in August, British Pound was up 0.35 per cent against the dollar in the same period.

In India, foreign portfolio investors (FPIs), who turned negative in July 2019 — following the government’s budgetary announcement of imposing a surcharge — continued to remain net sellers in the market. While they invested a net of Rs 6,488 crore in the debt market in August, they pulled out investments worth Rs 10,815 crore from domestic equities, thereby resulting in a net outflow of Rs 4,253 crore in August.

Advertising

A Care ratings report said that depreciation of 3 to 4 per cent could be expected for the year as global factors would continue to weigh heavily on the currency as well as FPI flows.

Alongside the global pressure, the ratings agency said, “Uncertainty on the growth path of the Indian economy has also weakened sentiment that has affected the Rupee. The Reserve Bank of India has revised its growth forecast for FY20 downward from 7 per cent in the June 2019 meeting to 6.9 per cent in August 2019 meeting,” said Care Ratings. It added that as the future of exports remains uncertain this year, it has only added to the declining sentiment.

Experts say that stable Brent crude oil prices have offered great relief to the Indian currency as a spike in crude oil prices would have led to a sharper depreciation of rupee and fund outflow by FPIs.

It is, however, important to note that the RBI has not been seen intervening in a bid to arrest the decline of rupee despite a 4.25 per cent fall in rupee in a matter of three weeks. The forex reserves that stood at $429.6 billion at the end of week ended July 26, rose to $430.57 at the end of week ended August 9, 2019.

A market expert said that since all emerging economy currencies are losing against dollar, there is not much need to intervene as of now. By comparison, last year in September-October when the rupee fell to a low of over $74 against the dollar in line with rising crude oil prices and fund outflow by FPIs, the RBI was seen to be intervening to arrest the volatility.