The rupee is falling, as macros of the economy continue to worsen. There are a combination of factors at play, which have dragged the rupee lower.
As we write, the rupee has fallen past the 68 levels. Let's see some reasons for the sharp drop in the rupee.
1) Dollar strength across a basket of currencies
The US dollar has been gaining strength across a basket of currencies. Bond yields are also rising, as the US economy gathers momentum.
2) Drop in portfolio flows
Foreign Portfolio Investors are selling heavily in the Indian markets. Foreign investors pulled out nearly Rs 18,000 crore (USD 2.65 billion) from capital markets so far this month primarily due to surge in global crude prices and heightened US-Iran tensions.
It is unlikely that the selling would stop. Indian markets have remained very expensive, which is another reason for the sharp sell-off by these set of investors. Political worries, where there are worries of a second term for the Narendra Modi government has also played on the mind of investors.
While the sharp sell-off in equity markets globally prompted funds to pull away from the region, worries over fiscal slippage, bank NPAs and a more hawkish RBI have affected flows to India.
3) Rising crude prices
Two of the major components of India's import bill is crude oil and gold. However, we have seen import of gold falling, so there are no worries on that front. Crude prices have risen substanially from $65 to $80, ever since US President Donald Trump decided to cancel the Iran nuclear deal.
India imports 70 per cent of its crude requirements and any rally in crude, inflates the import bill and impacts the currency as well.
This has pushed the rupee to dismal levels that we are now seeing.
Is there light and the end of the tunnel?
Some estimates suggest that the rupee could be headed for the 70 levels. It all depends on how the macro situation in the country pans out, including the fiscal deficit and the current account deficit. The latter is likely to widen, given the gains in crude.
At the moment, we believe that the rally in crude maybe over. From here on, we might see some sell-off in the commodity.
This may lead to some recovery in the rupee, due to a sentimental impact. However, one cannot be sure of portfolio inflows gaining ground, as investors continue to remain worried over market valuations in India. Hence, dollar outflows through FPIs is possible
If the US economy gains momentum and the dollar strengthens against a basket of currencies, it would also against India. However, a range of 67 to 70 is possible over the next one year.