Top 5 Reasons Why Indian Rupee Is Falling Against US Dollar
The Indian Stock Market, especially the Sensex which has made new highs just a few days back (touched an intraday high of 38000 for the first time) and on the other hand the Indian rupee has been witnessing chaos against the US dollar making it extremely difficult for the equity Investors to take a call, to invest in equities or not to invest in equities?
The Indian currency breached the INR 70/USD mark for the first time and has now depreciated close to 10% in the year 2018 against the US Dollar.
Without debating much either on the stock market or equity investing, Finblab wants to cover the key points which are leading to depreciating INR against USD.
Rising Crude Oil Prices and Indian Rupee
India, as a country, is a net importer of crude oil and imports closely 80% of its oil requirements. A significant rise in Brent Crude prices will stress (1) India’s Fiscal & Current Account Deficit, and (2) Trigger Inflation concern for the Reserve Bank.
On the other hand, the United State (US) is the biggest importer of crude oil. So as and when the crude oil prices go down, it typically means the US will be saving more dollars to buy crude, as a result of this the USD as a currency strengthens, leading to fall of INR (Indian rupee) and other currencies at the Forex market.
The Brent Crude is currently trading at 72 USD / barrel and every 10 USD rise in crude raises India’s inflation risk and impact country’s GDP growth.
Recovery in the US Economy:
The major reasons behind Indian Rupee fall are strengthening US Dollar on recovery in the US economy.
The Fed Reserve has increased rates almost four times since Donald Trump became President of the country, showing faith in Trump administration, and recently Lira (Turkish currency) losing 28% against the USD (since, US decided to impose tariffs and is also one of the reasons impacting INR) in August.
Before that, the trade war between the US and China also affected major currencies of the world.
FIIs Remain Seller:
FIIs (Foreign Institutional Investors) remain net seller in equity segment for the last couple of months. There was a capital outflow from India of around $8.9 billion from the start of the current fiscal till July 26, 2018; since then, there has been $1.9 billion of inflows.
Considering the impact of INR fall, analysts expect the currency depreciation is always favourable for export-oriented sectors like Auto Ancillaries, IT, Pharma, Speciality Chemicals, Textile, and PSU Oil but put margin pressure on sectors like coal importers and oil marketing companies and companies which raise money through external commercial borrowing.
India’s Macro Factors:
Macroeconomic factors such as CAD, Interest Rates, Inflation Rates, GDP, Demographics and Poverty rates, and Political scenario etc… are some of the indicators for any economy.
In India, currently, the interest rates are hovering around 6%, retain inflation rates below 5%; the current account deficit at sustainable levels, GDP is in the range of 7% to 7.5% and a stable government power.
Though, analysts of the view that there are no immediate reasons for worry as the macro fundamentals of Indian economy are currently much better as compared to that of 2013 when the currency was subject to the so-called taper tantrum.
Election Year:
India has a stable government (Narendra Modi led NDA government) in the power since 2014 and since the duration of 5 years ends in 2019, the country will have a general election in next year. Election years in any country are known to bring it’s own idiosyncratic risks and India is no exception. But this also considered as a key point which force INR to depreciate.
Conclusion –
Experts of the view that the current movement in INR should be viewed more against a global backdrop rather than domestic macros.
Union Minister Arun Jaitley has also said that India has comfortable foreign exchange reserves to deal with any undue volatility in the currency market and developments are being closely monitored.
Pre-emptively, the government or RBI can always go for a dollar bond issuance if so required.
Also Read –
1) Finblab’s Valuepick Stock for the month of August 2018 – Meghmani Organics Ltd
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