From trade war to Turkey's lira crisis, factors that led to rupee's decline

The Indian currency has lost 10.5% of its value this year so far against the backdrop of India's ballooning fiscal deficit

The gusty rupee went into a tailspin and suffered one of its worst stretches in history - crashing mercilessly to breach the key psychological 70-mark to end at a lifetime low of 70.15 against the resurgent US dollar. An unprecedented speculative sell-off along with heavy dollar demand from importers sent the domestic unit tumbling by a steep 132 paise - its biggest weekly fall this year so far despite government's soothing rhetoric.

The Indian unit collapsed to a lifetime low of 70.40, triggering currency market intervention by the central bank to defend the beleaguered rupee.

Panic and capitulation overshadowed trading sentiment as traders and speculators saw no signs that monetary authorities would step into the foreign exchange market to support the domestic unit.

The home currency had stamped its biggest one-day fall in five years on Monday.

Headwinds in the form of unsupportive global factors in the midst of Turkey's currency crisis also accompanied by slowing-economic fears and panic capital flight predominantly kept overall forex mood highly bearish.

Hardening concerns over widening trade deficit also added some pressure as data showed country's trade deficit soared to a nearly five-year high of $18 billion. Currency and financial markets worldwide were swept in the turmoil gripping over Turkey's currency crisis following an intensifying trade dispute with US president Donald Trump, fuelling fears of a deepening financial crisis in Turkey.

The Indian currency has lost 10.5 per cent of its value this year so far against the backdrop of India's ballooning fiscal deficit and surging crude prices and mounting worries surrounding the US-China trade conflicts.

The rupee also took a sharp reversal against the Euro, British pound and Japanese yen. Meanwhile, country's forex reserves have declined by $25.147 billion between April 13 and August 10, with the rupee on a downward spiral since the beginning of the year forcing the Reserve Bank to sell dollars to defend the local currency. The forex reserves plunged to a low of $400.88 billion in the week to August 10, losing a whopping $1.822 billion within a week, according to the latest to RBI data.

Foreign investors, however, pumped in over Rs 85 billion into the Indian capital markets following weakening crude oil prices and better corporate earnings. Earlier this week, the rupee opened with a gap-down at 69.47 from the weekend close of 68.83 at the inter-bank foreign exchange (forex) market. Trapped in a negative bubble, home currency descended alarmingly as panic-stricken investors flocked to the world benchmark following the ongoing rout in emerging markets.

Hammered by heavy dollar demand, the domestic currency pierced through the 70-mark to hit a lifetime low of 70.40 before ending at a historic low of 70.15, revealing a sharp loss of 132 paise, or 1.92 per cent. The RBI, meanwhile, fixed the reference rate for the dollar at 70.2287 and for the euro at 79.9718. The 10-year benchmark yield also shot-up by 11 bps to end the week at 7.86 per cent from 7.75 per cent.

On the energy front, crude prices edged higher, though posted yet another weekly decline on worries that oversupply would weigh on the U.S. market and that trade disputes and slowing global economic growth would slow demand for oil.

The Brent crude futures tumbled over 1 per cent to $72.95 per barrel. Globally, the US dollar fell against a basket of peers on Friday amid lower demand for the safe-haven greenback, as traders hoped next week's trade talks between the US and China would ease tensions between the two countries. A plunge by the Turkish lira and concerns over China's economic health hit emerging market currencies this week, boosting the dollar.

The euro rebounded from a more than 13-month low touched earlier this week against the dollar on easing worries over the fallout from the Turkish lira. The dollar index, which measures the greenback's value against a basket of six major currencies softened to 96 from 96.19. In cross-currency trade, the rupee retreated sharply against the pound sterling to end at 89.12 per pound compared to last weekend level of 87.86 and also tumbled against the euro to finish at 79.80 from 78.83. The local currency remained under pressure against the Japanese yen and settled substantially lower at 63.28 per 100 yens from 62.03 earlier.

In the forward market, premium for dollar dropped sharply owing to heavy receiving from exporters. The benchmark six-month forward dollar premium payable in December slumped to 107-109 paise from 112.50-114.50 paise and the far-forward contract maturing in June 2019 drifted to 254.50-256.50 paise from 260-262 paise.