Amidst the Rupee rumble

In the past three months, the rupee has fallen by about 2 per cent versus the US dollar and has trended towards historic lows. There are several reasons for this. There is also reason to believe that the rupee is likely to continue weakening over the next few months or even longer. The rupee hit a record low of Rs 68.73 in late November and it has since traded below Rs 68 multiple times (see Figure 1). The pressure has been due to several reasons. First, the RBI had to complete a reverse swap of about $26 billion equivalent. This was a legacy from the Q3 2013-14, when Indian banks were encouraged to raise FCNR (foreign currency non-residential account) dollar-denominated deposits and swap them for rupees. The spike in the demand for the USD would have pushed up the INR-USD rate. That's done and dusted. Foreign portfolio investors (FPIs) have sold both rupee debt and rupee equity in large quantities in Q3 after being positive on rupee assets through the first half of 2016-17 (see Table 1). Again, FII selling increased the demand for the USD (and increased the supply of the INR). FPIs could continue selling rupee assets since they have gone negative on all emerging markets. Rising crude prices are a third reason for the rupee to have lost ground (see Figure 2). Higher crude prices always affect India's trade balance. This trend could well continue or maybe not. The geopolitics of oil are very complicated. OPEC has put together an agreement (which includes commitments from Russia, which is a large exporter but not an OPEC member) to restrict supply. But the US shale industry will start pumping from shutdown wells if prices move over, say, $65/barrel. However, shale takes about three-four months to get going. There are also conflicts in Nigeria, the Middle East, Crimea

This article was originally published on March 01, 2017.