Will Rupee Touch Its All-Time Low?

Tue, 19 Jan Pre-Open

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The last few days have seen the rupee sliding considerably against the US dollar. And the way it is heading can perhaps be the focal talking point in the coming days. It now takes more than 67.50 rupees to buy one dollar. At the time of writing, the rupee stood at 67.70 to the US dollar. This level isn't that far from the all-time lows witnessed in August 2013, when it stood at 68.80.

Will the rupee depreciate further? What will be the repercussions of the same? Let's answer this by jotting a few points that are closely related to the rise and fall of the rupee.

Indian Exports

Indian exports have fallen dramatically. One can note that the performance on the export front has been much worse during the second half of 2015.

A stagnant rupee is making Indian goods less competitive. In order to boost Indian exports, the rupee needs to be further depreciated. And this can mean the rupee sliding further to touch its lowest levels.

Foreign Investments

Trade flows can safely be called as the fundamentals on which exchange rates rest over the long-term. Unfortunately, India does not have a good track record of foreign investments flows. The reasons can be slow pace of economic reforms and political logjam. Owing to this sluggish environment, foreign institutional investors (FIIs) have continued to be net sellers this year. They have sold equity shares exceeding US$ 797 million. These low levels of foreign investments are likely to weigh on India's foreign exchange reserves.

US Rate Hike

With the US Fed raising interest rates, funds are seen fleeing from emerging markets to the US. India has also witnessed capital outflows post this development. This has led to an appreciation in the US dollar and in turn depreciated the other currencies, including the rupee.

External Debt

India's external debt in September 2015 stood at US$ 483.2 billion. This was on the back of increase in long term liabilities and commercial borrowings. The recent decline in rupee has made the situation even worse. This is because the amount of rupees required to pay back the debt goes up due to the currency depreciation. This debt burden makes India exceedingly vulnerable to any external sector shocks.

So, a fall in the rupee can be tumultuous for the economy. While the Reserve Bank of India and the government may take immediate steps to curb sharp drops in the currency. However, India needs to improve its global competitiveness, clear political logjams, ease the business scenario to attract investments and rein over the deficit problems to strengthen the Indian currency's long-term fundamentals.

However, as things stand today, the rupee may continue to be volatility in the near term.

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