The Indian rupee is inching close to the Rs70 mark against the dollar, battered by global economic turmoil.
On Aug. 13, it closed the day at Rs69.93, its weakest ever. The 1.56% decline was also the currency’s sharpest single-day fall since September 2013. The Rs70-level against the dollar is seen as a psychological threshold which, once breached, may be treated as the new normal for the currency.
Moreover, things could get much worse in coming months for Asia’s worst-performing currency of the year. If global concerns, including the US’s protectionist measures against countries such as Turkey and China, persist, the rupee may even slide to Rs72 against the dollar, according to analysts.
Already, higher crude oil prices, a widening trade deficit, and the exit of foreign investors from India have shaved off over 8% from the rupee’s value this year.
Cold Turkey
Turkey has been in a rough patch this year, with its currency, the lira losing 50% in the last over 12 months.
On Aug. 10, the US president Donald Trump imposed higher tariffs on imports of steel, aluminium, and other commodities from Turkey, which will now hit its economy further. The US and China, at the same time, are engaged in a trade tussle, increasing duties on each other’s goods and sparking fears of a global trade war.
It is emerging economies like India that are getting hammered. “These external factors…are dragging the rupee down as well,” explained Madan Sabnavis, chief economist at CARE Ratings. The Indian stock market, too, is reeling under the effects of these developments.
And, so far, there is no sign either of the Reserve Bank of India (RBI) stepping in to rescue the rupee.
“Typically, when it is a global meltdown then the RBI may not step in immediately to ensure that the competitive bias of the rupee is maintained as compared to the currencies in other emerging economies. Therefore, the central bank needs to be careful about the intervention,” said Indranil Pan, chief economist at IDFC Bank.
But if the RBI stays away for too long, it could be a problem, too. “If the market gets a signal that the regulator is not interested, the rupee can lose its value further and can go up to even the 72 levels against the dollar,” Sajal Gupta, head of forex and rates at Edelweiss Securities, told Quartz.
Watch out
Still, economic conditions in India are relatively stable. So, if and when global conditions improve, the rupee may regain strength.
Earlier this year, rising crude oil prices had unnerved the currency. Since India imports about 80% of its oil needs, it needs to spend more dollars to procure oil, which affects the Indian economy. This could widen the trade deficit (when a country’s import bill is bigger than its export bill), putting its finances under duress.
However, as crude oil came off the highs it reached earlier this year, the currency somewhat stabilised last month. Considering there are no other major concerns on the domestic front, analysts are also hopeful that the rupee will regain some strength. Stay tuned.