Why is the Rupee is falling against the dollar?

  26-Aug-2018 14:37:30

India USA DollarModiRupee

The Rupee hit over 70: factors that led to this

The rupee extended its fall and breached the 70-mark for the first time against US dollar on 14th August, hitting the new low of 70.10 in intra-day trading. However, it closed at 69.90, up 3 Paise compared to the previous day, following a global currency crisis. There are several reasons for its fall but one of the biggest reasons is the effect of Turkish turmoil on Asian countries.

Turkish turmoil

The Turkish Lira (Turkish currency) lost one-fifth of its value against US dollar in the second week of this month, hitting a new low on 13th August and nearly a 40% fall over last one year. But why Lira is falling? The answer to this is its trade war against the US. The U.S. Treasury had recently sanctioned two Turkish Ministers in response to Turkey’s continuing detention of American pastor Andrew Brunson on spying and terror charges. Donald Trump also tweeted that he would double import tariffs on Turkish steel and aluminium. This war led to an economic crisis in Turkey, further leading to increased rates and less investment in Turkey. Turkey is one of the major emerging economies in the world and the noises of trade war and slump in Lira sparked fresh concerns in the global market. Indian investors are more concerned as emerging economies like India seem most vulnerable in face of Lira erosion. Rupee has been among the hardest hit in Asia, due to this, thanks to the wide Current Account Deficit (The current account deficit (CAD) is a measurement of a country's trade where the value of the goods and services it imports exceeds the value of the goods and services it exports) that’s already strained by higher oil prices.

Strong US Dollar

The US dollar surged to fresh one-year high on July 19th. It reached that high after US Federal Reserve Chairman Jerome Powell expressed confidence in the U.S. economy and affirmed expectations that the central bank was on track to keep hiking interest rates gradually, as long as Dollar is getting stronger Rupee will lose its value due to increasing demand of Dollar against Rupee.

Sliding Yuan

The Chinese Yuan fell to one-year lows, plunging to a level of 6.8128 to the dollar in the onshore market. Yuan’s weakness sent jitters across most of the Asian markets. The drop in Chinese currency always affects the Indian Rupee because they are dependent on each other.

Capital Outflows

Data available with the National Securities Depository Limited showed that during the period January-July (till July 20), foreign portfolio investors (FPIs) have pulled out Rs 49,603 crore of investments from the domestic market and less investment means less economic growth and less inflow of Dollars in the Indian market. This leads to a fall in the value of Rupee against Dollar.

Crude oil Prices

Crude oil prices have always been a major concern for India. Global investors think that the spike in crude oil prices will directly affect India's current account, due to which inflation will rise. So, Investors are selling off here in India. This is one of the main reasons for a drop in the value of Indian currency against US dollar.

Political Instability

Recently, the opposition party put across a ‘no-confidence’ movement against the ruling party which led to political instability. Political instability most of the times weigh down the markets leading to falling in Rupee. The rupee breached the 69-mark the day on which ‘no-confidence' was scheduled.

Indian investors and some financial experts are neglecting a long-term effect of this and saying that Rupee is depreciating due to external factors and there is nothing to worry about. RBI, however, is concerned with this and it sold Dollars through public sector banks, preventing a further slide. Turkey, on the other hand, is still struggling to prevent the further drop, it might consider the possibility of going to the IMF (International Monetary Fund). But, having to obey IMF conditions in return for assistance would be a blow to President Erdogan’s prestige.

Whatever may be the reasons, India is facing a financial problem and it needs to deal with it before any financial crisis. With Lok Sabha elections in the upcoming year and fading charm of Prime Minister Modi, this problem is like “a light purse is a great curse” for this government.

- By Pallav Singh