Rupee in a free fall, hits fresh all-time low of 70.32 level against dollar

The rupee fell to a fresh record low in opening trade today with investor sentiment affected by a widening trade deficit on the domestic front and the broad rise in the US dollar compared to other Asian peers. The currency fell 42 paise to hit a fresh all time low of 70.32 intra day.

Earlier, it opened 35 paise lower to 70.25 level compared to the US dollar.

Arun Thukral, MD & CEO of Axis Securities said, "The recent fall in INR is owing to the Turkish financial crisis along with the strengthening USD. The Turkish lira crisis is weighing heavily on emerging market economies, especially those with large current account deficits. India's weakening current account is an issue led by volatile oil prices. Also, growth in the US economy has led to the fall of INR owing to a strong USD. With two more rate hikes expected in the US in 2018 and the RBI likely to maintain status quo in the near term, we believe that in the current scenario pressure on INR may continue over the coming few months." 

Trade deficit widened to a more-than-five-year high of $18.02 billion in July as against a deficit of $11.45 billion during July 2017, the commerce ministry said on Tuesday, driven largely by a surge in oil imports.

Gold imports surged by 40.94 per cent in July to $2.96 billion compared to $2.102 billion in July 2017.

Mustafa Nadeem, CEO at Epic Research said, "Rupee depreciation has its root in the currency war and then followed by Turkish crisis as tensions rise between it and the US. Trade war and the after effects have taken a toll on the most Asian currencies that are from the Developed economies and worst is for emerging economies such as India. The current situation has already been worst for Indian INR as it drifted to above 68 levels on the back of US Treasury bills which is now hitting the 2% mark, crude oil price rise, which is up 40% for the year, and concerns on widening CAD. All this has played out already worse for INR. Turkish crisis further fueled the spark to depreciate it further against the basket of major currencies. This may continue as we still believe the projection for upside for rupee is now at 72.2 while 69.5 technically seems to be base for this upmove."

The dollar held near a 13-month peak on Thursday as political turmoil in Turkey and concerns about China's economic health continued to support safe-haven assets and weighed on emerging market currencies.

Anagha Deodhar, analyst at ICICI Securities said, "There are three main factors going against the rupee currently - weakening current account, risk-off sentiment triggered by the Turkish crisis and strong growth in the US. Firstly, India's current account deficit is set to widen to 2.8% of GDP this year from 1.9% in FY18 primarily due to higher oil prices. The latest trade deficit number (for Jul '18) came in at a 5-yr high further aggravating concerns about India's external sector health. Secondly, the Turkish lira crisis is weighing heavily on emerging market economies, especially those with large current account deficits. And finally, growth in the US is strengthening as indicated by high frequency indicators including GDP growth, unemployment numbers, retail sales etc. While two more rate hikes are expected in the US in 2018, the RBI is likely to stay put till Q4FY19. As a result, the potential widening of interest rate differential is also weighing on the rupee. We expect the rupee to remain under pressure in the near term and trade around 70-71/dollar level"

On Tuesday, the rupee hit a record low of 70.1 per dollar, as concerns about Turkey's economic woes spreading to other emerging markets such as India persisted.

Commenting on the impact of rupee fall, Pushkar Mukewar, co-founder and co-CEO at Drip Capital said, "From the Indian economy perspective, immediate beneficiaries from the Rupee fall are going to be exporters at large. In the immediate term, there will be benefit to SMEs as most of them are unhedged and they should see a higher spot rate. In the medium term, given that manufacturing cost will remain the same and exporters continue to maintain the same rupee margin levels, they are likely to see increase in demand as the dollar rate of products will become more competitive. However, in the long term, after a year, things will begin to stabilize as inflation will rise and raw material prices will shoot up, leading to increase in manufacturing cost. Furthermore, we have to be vigilant about fluctuation of currencies in other competing markets in relation to Indian Rupee to measure the impact on our economy".

Meanwhile the government is banking on RBI's foreign exchange reserves which stood at $402.70 billion in the week ended August 3 to stem the rupee fall.

However, the disturbing part is that they have fallen by as much as $1.49 billion over the preceding week largely due to the sharp increase in crude oil prices that have led to an increase in the country's import bill.

Prateek Jain, Director at Hem Securities said, "With the geopolitical concerns of Turkish lira and US China trade war, investors are nervous about the widening trade deficit and continuing  volatility in the future which  has made dollar a new safe haven for the investors. This lead to strengthening of Dollar Index against the major currencies in the world and India is no different. Rupee touched an all-time low of 70.32 and the trend is likely to continue to the levels of  70.80 to 71  unless the Chinese delegation going to USA reduces the tension of trade war".

Meanwhile, the Sensex and Nifty fell 31 points and 6 points to trade at 37,826 and 11,428 levels, respectively.

Asian shares fell after deepening worries about global economic growth, particularly in China, set off a rout on Wall Street.

Japan's Nikkei 225 index fell 0.2 percent to 22,158.75 and the Hang Seng in Hong Kong lost 0.6 percent to 27,155.66. The Shanghai Composite index sank 0.9 percent to 2,699.60. South Korea's Kospi reopened from a holiday and tumbled 1.0 percent to 2,236.89. Australia's S&P ASX 200 edged 0.1 percent lower to 6,323.20. Shares fell in Taiwan and Southeast Asia.

Wall Street's major indexes closed lower on Wednesday, with the S&P 500 down 0.8 percent, its biggest percentage drop since late June, amid disappointing earnings and escalating global trade worries.

Written and edited by Aseem Thapliyal