The rupee set a new all-time low record today, staying above the psychologically-important 70 mark against the dollar for the second consecutive trading day. The factor that sent it sliding 43 paise to Rs 70.32 in opening trade from the previous close was India’s widening trade deficit. The rupee then proceeded to hit 70.40 against the greenback. Here’s a look at all the factors weighing down the rupee.
Widening trade deficit: According to latest data released by the trade ministry, India’s trade deficit hit a 5-year high of $18.02 billion in July, up 8.5 per cent month-on-month. This is mainly because of surging oil imports, which grew by over 57 per cent year-on-year to $12.35 billion. While total imports jumped 28.81 per cent to $43.79 billion, exports only went up by 14.32 per cent to $25.77 billion (year-on-year).
While the textbooks all claim that the depreciating rupee gives a boost to exports, the numbers tell a different story. According to Mint, India’s currency weakened around 22% per cent against the dollar between 2012 and 2017 and the compound annual growth rate in exports during the same period was a meagre 0.2 per cent. Given the news on the US-China trade war, the outlook for exports is far from bright.
The far-from-optimistic outlook on oil prices makes matters worse. Unless our exports pick up substantially, this may worsen the deficit even further. That will make the Rupee slide further, raise domestic inflation and may lead to tighter monetary policy from RBI by raising interest rates.
The combination of rising import bills and slow export growth has led to a worsening of India’s current account deficit (CAD). The latter has jumped from 0.6% of GDP in 2015-16 to close to 2% in 2017-18. And media reports peg CAD jumping to $22-31 billion in the current fiscal. That is again bad news for the rupee because a high deficit means the country has to sell rupees and buy dollars to pay its bills, which further reduces its value.
The widening trade deficit against the backdrop of growing global uncertainty is expected to keep exerting pressure on the rupee in the near term.
The Turkish crisis: It was the free falling Lira, the Turkish currency, that accelerated the rupee’s depreciation earlier this week. The currency has lost more than 40% against the dollar this year on account of the country’s deteriorating ties with the United States and concerns over President Tayyip Erdogan’s increasing influence over the overheated economy.
“The plunge in the lira, which began in May, now looks certain to push the Turkish economy into recession, and it may well trigger a banking crisis,” Andrew Kenningham, chief global economist at Capital Economics, told Reuters.
Given how interconnected the global financial system is, the fears of spillover impact in other emerging markets – at least in the short term – have sent investors scrambling for safe haven currencies like the dollar and hammered emerging market currencies, the rupee included, in the bargain.
Global trade tensions = stronger dollar: US President Donald Trump’s trade policies have also beefed up the dollar in recent times. The greenback climbed to a 13-month high against a basket of six major currencies on Monday.
The Trump administration’s move to impose import tariffs against China, Europe, Mexico, Canada and now Turkey is expected to stoke US inflation, which could accelerate the pace of Fed rate hikes and, in the bargain, strengthen the dollar further. The U.S. Federal Reserve is expected to raise interest rates twice more this year.
A strong dollar is bad news for India because it makes imports more expensive. And that’s something the country can ill afford right now. Besides, the escalating US-China trade war continues to roil forex market sentiments.
Yo-Yoing foreign capital flows: Stakeholders are now keeping a close watch on the volatility in the equity market as any FII outflow could only widen the CAD. Though FII reversed a three-month trend to turn net buyers of Indian equities in July, on a year-on-year basis they remain net sellers. The Turkish crisis may change things at home. Provisional data reportedly shows that in the first 14 days of this month, FIIs sold stocks worth over Rs 1,100 crore.
Higher interest rates in the US could accelerate the sell-off in the months to come. It does not help that the general elections are coming up next year – a time when most foreign investors go into fence-sitting mode.
Sourse: BT Economy