Rupee slumps to all-time low

The rupee breached the 69 to the dollar mark for the first time, crashing to a record 69.09 on Thursday, compared with the previous low of Rs 68.865 in Nov 2016, before ending at 68.79. The currency has lost 8 per cent this year and macroeconomic headwinds will keep it under pressure.

WHAT TRIGGERED THE CRASH?
Rising crude oil prices and tightening of interest rates in the US. With India importing most of its oil needs, any rise in prices means more dollars are needed to buy the same amount of oil. As US rates go up, investors who borrowed at a cheaper rate find returns from investing in India not worth the risk. If US G-Sec returns at 1.5 per cent made buying Indian G-Secs at 7 per cent a good investment, US yields at 3 per cent make Indian bonds at 8 per cent less attractive. Borrowing to invest in India also becomes expensive.


WHAT ABOUT FIIs?
Dollar inflows from foreign institutional investors (FIIs), which have been supporting the rupee in the last three years, have dried up. So far in 2018, FIIs have pulled out Rs 46,197 crore from the Indian markets.

IS A WEAKER RUPEE BAD FOR THE ECONOMY?
Not necessarily. Rupee is still overvalued, according to the 36-country Real Effective Exchange Rate (REER) calculation. REER is currency value adjusted for inflation. RBI data shows the rupee is overvalued by 14.67 per cent as of May. A weaker rupee may give exports a boost as they become cheaper.

IS INDIA ALONE IN GETTING WHIPSAWED?
No. Most emerging market (EM) currencies are crashing for different reasons. The Chinese yuan has also been under pressure despite its current account surplus, unlike India. Indonesian rupiah & South African rand are also losing value.

WHAT’S IN STORE FOR EMS?
Given the looming prospect of trade wars and the European Union ending its unconventional monetary policy, financial market volatility looks set to climb further.