Money & Banking

Trade-deficit woes drag rupee to new lows

Gurumurthy K BL Research Bureau | Updated on September 10, 2018 Published on September 10, 2018

Indicators on the charts remain negative, suggesting the possibility of a further fall

The free-fall in the Indian rupee continues. The rupee remained under pressure all through the week and tested the psychological level of 72 last Thursday. Though the rupee managed to recover slightly on Friday, it failed to gain momentum. The country’s current account deficit (CAD) data released on Friday came as a spoiler, adding fuel to the fire. The currency tumbled to a new record low of 72.67 on Monday before recovering to close at 72.44, down 1.71 per cent for the week.

Deficit widens

India’s CAD data was released on Friday. The data showed CAD widened the most in five years to $15.83 billion in the first quarter (April to June) of this fiscal. Merchandise trade deficit increasing by 9 per cent (year-on-year) to $45.75 billion in the first quarter of FY19 from $41.93 billion over the same period last year dragged the CAD sharply lower to a five-year low.

With crude oil prices continuing to stay at elevated levels, there is a strong likelihood of the trade deficit increasing in the current quarter (September) as well. This, in turn, may see the CAD widening further. As a result, the deficit concern will continue to weigh on the rupee. As such, the rupee’s strength is likely to be limited in the coming months, and the possibility of it tumbling to further fresh lows cannot be ruled out.

FPIs’ sell-off

Foreign Portfolio Investors (FPIs) seem to have resumed their selling. The FPIs, after buying India’s debt securities worth $7 million and $506 million in July and August, are turning net sellers. FPIs sold $648 million in just the first week of September. If their selling intensifies, it will increase the pressure on the rupee and aid in dragging the currency further lower.

Rupee outlook

The rupee falling over 1 per cent each consecutively for two weeks has intensified the downside pressure on the currency. The region between 72.10 and 72 will now be a key near-term support. As long as the rupee trades below 72, it is likely to remain under pressure.

The indicators on the charts are also giving negative signals. The 55-week moving average has crossed below the 200-week moving average, and is on the verge of crossing below the 100-week moving average.

This is a bearish signal indicating that the upside could be capped in the short term.

As such, as long as the rupee remains below 72, a fall to 73 and 73.7 is likely in the short term. Inability to reverse higher from 73.7 will increase the possibility of the rupee extending its fall to even 74.5 in the coming weeks.

The currency will get a breather only if it manages to breach 72. Such a break can trigger a short-term relief rally to 71.5 or even 71.

Published on September 10, 2018

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