Rupee closes at new record low of 70.16 amid volatility in currency markets

The rupee continued to weaken further to close at a new record low of Rs 70.16 against the US dollar on Thursday, reflecting the volatility in global currency markets triggered by the crisis in Turkey and concerns over India’s rising trade deficit.

The Indian currency opened above Rs 70 and stayed over that crucial threshold through the day’s trading, according to Clearcorp Dealing Systems data. It slumped to an all-time low of 70.40 per dollar (intra-day) on persistent foreign fund outflows but recovered subsequently. 

Besides the upheaval in the international currency markets, weak data for India’s merchandise trade for July also shaped the sentiment, said foreign exchange dealers. Trade deficit expanded to $18 billion in July, from $16.6 billion in June, partly due to higher oil import bill.

 “Things don’t look good for the rupee,” said Abhishek Goenka, chief executive officer, India Forex Advisors.

Emerging markets contagion, worries about current account deficit and weakness in yuan are likely to weigh on the rupee.

The present imbroglio in the political space will cause volatility depending on the direction in which the dollar-Turkish lira value moves, said Madan Sabnavis, chief economist, CARE Ratings. “A value of Rs 69/$ should be the equilibrium, based on expected fundamentals in the rest of the year,” he said. This is predicated on expectation of a higher trade and current account deficits, but higher invisibles and improvement in foreign investments (both portfolio and direct) and maintenance of external commercial borrowings, he added.

The falling rupee was not a cause of worry as it was getting back to its natural value, said Rajiv Kumar, NITI Aayog vice-chairman. "The rupee rose about 17 per cent during the last three years. 

Since the beginning of this year, it has declined by only 9.8 per cent. So, it has recovered. It is rather coming back to its natural value," he said.
 

The rupee should be realistically valued and should not be overvalued, he said, adding that the exchange rate is a price which should reflect true equilibrium between demand and supply. One should not be under the impression that appreciation of rupee is a sign of a good economy, he added.
 

ICICI Bank in a note said the storm in the foreign exchange market, especially in emerging market currencies, is unlikely to abate in a hurry.
 

“The Goldilocks scenario in emerging markets (EM) categorised by low interest rates globally, low inflation and ample liquidity has witnessed a reversal in recent months. The resurgence of dollar strength has been the biggest risk faced by EM assets,” the note said. 

The monetary policies of the US Federal Reserve and European Central Bank have clearly indicated that liquidity will be tightened, which could get more pronounced by the end of 2018. 

Improving US fundamentals and a faster pace of tightening by the Federal Reserve have given rise to the strength in the dollar, which has aggravated the stress of elevated dollar debt levels in EMs. 

Since the beginning of this year, it has declined by only 9.8 per cent. So, it has recovered. It is rather coming back to its natural value," he said.

The rupee should be realistically valued and should not be overvalued, he said, adding that the exchange rate is a price which should reflect true equilibrium between demand and supply. One should not be under the impression that appreciation of rupee is a sign of a good economy, he added.

ICICI Bank in a note said the storm in the foreign exchange market, especially in emerging market currencies, is unlikely to abate in a hurry.

“The Goldilocks scenario in emerging markets (EM) categorised by low interest rates globally, low inflation and ample liquidity has witnessed a reversal in recent months. The resurgence of dollar strength has been the biggest risk faced by EM assets,” the note said. 

The monetary policies of the US Federal Reserve and European Central Bank have clearly indicated that liquidity will be tightened, which could get more pronounced by the end of 2018. 

Improving US fundamentals and a faster pace of tightening by the Federal Reserve have given rise to the strength in the dollar, which has aggravated the stress of elevated dollar debt levels in EMs.