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Despite Centre’s recent slew of measures to stem the rupee’s decline against the dollar, including increasing import tariffs on various goods, the Indian currency crossed the 73-mark against the dollar on Wednesday.
Here is a quick look at the key factors dragging the rupee lower in the near term.
Crude factor
Brent crude prices are currently hovering around $85 per barrel and there is a growing consensus that prices are soon going to hit $100 per barrel. With US sanction on Iran to take effect from November 4, there is fear that the supply in the market will be greatly reduced, with OPEC struggling to bridge the deficit.
The rupee has a very strong correlation with crude oil prices since oil accounts for about 27 per cent of the country’s merchandise imports. The strong rally in crude oil prices is the primary factor that is widening the current account deficit. Most experts believe that CAD as a percentage of GDP could widen to between 2.8 to 3 per cent for FY 19, if crude prices continues to hurtle higher.
Continued rally in crude oil will therefore maintain the downward pressure on rupee.
Dollar gains
The US dollar index has suddenly spiked higher from 93.9 on September 20 to 95.3 currently. This was mainly due to the strong growth expectation for the US and the Federal Reserve hiking Fed Fund Rate by another 25 bps in its monetary policy last week. The fact that the Fed is guiding for another rate hike in December followed by three more hikes in 2019 is causing the dollar to strengthen.
A strong dollar spells trouble for the USD-INR cross. Besides that as foreign investors pull money back to US dollar denominated assets, it causes outflows from assets in emerging markets, causing pressure on EM currencies.
FPI outflows
The third factor that is causing immediate pressure on the rupee is the foreign portfolio investors pulling money out of equity and bonds. While FPIs have pulled out close to $1.9 billion from Indian stocks, the outflows from debt is $7.1 billion in 2018. The outflows so far from equity and debt in FY19 is the highest witnessed since 2008-09.
A depreciating currency and higher interest rates in US is causing investors in Indian debt to move money out of India. With capital outflows continuing, there is a high risk of the entire balance of payment turning negative in FY19; another negative for the rupee.
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