The finance minister’s announcement on Friday to merge six relatively small banks into four bigger banks failed to lift market sentiment as the Sensex at the Bombay Stock Exchange fell over 500 points and the rupee lost up to 90 paise against the dollar to trade at a near 10-month low of 72.31 following concerns over the tariff war between the US and China, and a weak GDP growth in India of 5 per cent in the first quarter ended June 2019.
Why did the rupee fall sharply today?
Over the weekend, as the US announced fresh tariffs on China, concerns grew over escalation of the tariff war between the two largest economies in the world. While China witnessed a decline in its currency by around 0.6 per cent, the Indian currency that opened on Tuesday after three days, witnessed a sharp decline of 90 paise or 1.2 per cent. The markets also seemed disappointed with the growth in the Indian economy, with the GDP numbers for the first quarter having come in low at 5 per cent.
But hasn’t the rupee been falling for some time now?
Yes. Since July 31, the rupee has lost around 5 per cent from 68.86 against the dollar to trade at 72.3 on Tuesday. In the same period, the Chinese Yuan Renminbi has lost 4.3 per cent, and is now trading at 7.18 against the USD, a 11-year low.
While the rupee has been under pressure over the last five weeks — since the US Federal Reserve, at the time of announcing its first rate cut in a decade on July 31, stated that it was just a “mid-cycle adjustment”. The US Fed’s announcement took emerging markets by surprise; they had expected that a dovish stance would result in fund inflows in their countries.
FPIs have been exiting Indian markets over the last two months, and have sold Indian equities worth a net Rs 30,000 crore. However, in the same period, FPIs have invested a net of Rs 21,000 crore in the debt market.
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The government’s recent announcement to roll back the surcharge on FPIs also failed to revive their sentiments.
They have pulled out around Rs 5,500 crore from domestic equities since the rollback on August 23, 2019. The FPI outflow is also putting pressure on the rupee.