The Indian rupee hit the 58 mark to the U.S. dollar on Monday, eclipsing the earlier record low of 57.32 against the greenback. The rupee was hurt by broad global gains in the U.S. currency and weaker domestic shares. The partially convertible rupee closed at 58.15 per dollar after earlier hitting a low of 58.16, a 1.9 per cent fall from its Friday's close of 57.06/07.
Here are some major concerns answered
Is rupee the only currency to witness depreciation? The dollar has gained against all major currencies on hopes that the U.S. Federal Reserve might curb its asset purchases later this year. "Markets are front running some of the expectations of Fed eventually exiting from QE (quantitative easing) so this recalibration in Street could be ahead of the curve, but it's how typically markets behave," Thio Chin Loo, senior currency strategist at BNP Paribas told NDTV.
How does high current account deficit hurt the rupee? India's large current account deficit (export minus imports) needs large amount of capital inflows, which is unlikely because of the economic slowdown. In such a scenario, overseas funds become vital to India's economy. A surge in net foreign buying since 2012 - totalling almost $50 billion in both debt and stocks - has been key in narrowing the deficit. However, the dependence on short-term debt is resulting in the hammering of the rupee.
What's the immediate resistance for the rupee? Moses Harding of IndusInd Bank told NDTV that 57.50 was the last line of defense. Others believe the rupee is on course to breach the 60 mark. Last month, Rohit Srivastava of Sharekhan told NDTV that the U.S. dollar has surpassed November 2012 highs and it would not be surprising if the rupee crosses the 60 mark against the greenback.
What are the government and Reserve Bank doing? The finance ministry's chief economic adviser Raghuram Rajan said India would continue to take measures to curb the current account deficit. Finance ministry officials told Reuters the falling rupee was discussed in a previously scheduled meeting on Monday with market regulators and the central bank. Analysts say India's central bank has limited potential to prevent the rupee depreciation. The Reserve Bank does not have enough dollar reserves and surplus rupee in the system to defend the rupee aggressively, Mr Harding said.
What are the immediate threats from weak rupee? A weaker currency could undermine recent fiscal and economic measures by the government that helped spark a surge in foreign inflows. It also complicates the RBI's campaign to cut interest rates in a country still facing the prospect of losing its investment-grade ratings. The most immediate risk centres around financing the current account deficit.
(With inputs from Reuters)
