The Indian currency dangerously slipped to a low of 72.96 in early trade — within striking distance of its lifetime low of 72.99 hit last week but managed to pare some losses on likely intervention from the central bank. It briefly touched a high of 72.57 in mid-afternoon deals. The rupee has lost 49 paise in last two days. Heavy dollar selling by banks and exporters along with Greenbank’s weakness against some currencies overseas largely supplemented the recovery momentum.
Fear of trade war
The world’s two biggest economies – the growing tension between the United States and China – have kept the investors on the edge of the fear of global trade war. Analysts at HDFC Bank said, “In the near term, the rupee is likely to be under pressure because oil prices persist, capital flows continuously from emerging economies and trade war tension keeps the markets jerky.”
Increase in oil prices
Rupees in high oil prices have also declined. Deepak Jasani, Head of Retail Research at HDFC Securities said, “In the recently released Financial Stability Report, the situation in the banks’ rise in the price of oil by the Reserve Bank of India on the status of NPAs (Non-performing Assets) and in response to caution, there has been a sharp decline in the rupee”.
Emerging market exchange rates
It should be noted that the rupee depreciation is in line with emerging market exchange rates, which were largely fed through dollar strength. Deloitte India’s partner and chief economist Anis Chakraborty said that a difference between appreciation of the US dollar and a restraint in the euro has boosted the dollar’s strength, which has led to the depreciation of the rupee strengthened.
“Separately, monetary policy announcements by the U.S. Federal Reserve will have led to the re-routing of investment with the pressure generated on the rupee. Which is likely to define the route by the Fed in three periods. Rupee expected to pick up. ”
Foreign Institutional Investors (FIIS) have sold over Rs. 40,000 crores in debt and equity so far this year. ” A wider current account deficit and continuous outflow from FIIs pushed the currency lower,” Said Rahul Sharma, Senior Research Analyst at Equity99.
Due to the trade dispute between the United States and China, other Asian currencies also declined because investors kept on the edge. The rupee has declined 7.7 percent this year, making it the worst performing in Asia, closely followed by the Philippine Peso.
Supply Vs. Demand for Driving Dollar Value
When the U.S. exports products or services, it creates a demand for dollars. Because customers need to pay for goods and services in dollars. Therefore they will have to convert their local currency into dollars by selling their own currency to buy dollars to make the payment. In addition, when the U.S. government or large American corporations issue bonds to raise capital that purchased by foreign investors. Those payments will also have to be made in dollars. This also applies to the purchase of U.S. corporate stocks from non-U.S. investors, which would require the foreign investor to sell their currency to buy dollars in order to purchase those stocks.
These examples show how the U.S. creates more demand for dollars, and that in turn puts pressure on the supply of dollars, increasing the value of the dollar relative to the currencies being sold to buy dollars. On top of this, the U.S. dollar considered a safe haven during times of global economic uncertainty, so the demand for dollars can often persist despite fluctuations in the performance of the U.S. economy.