RUPEE AT NEW LOW – HEADING TOWARDS 70, FAST AND FURIOUS!

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By Ruma Dubey

All attention has now been diverted from the falling stock markets to the falling rupee vis-à-vis the US dollar. Today, the Rupee hit a new 28-month low at Rs.68.95.  The rupee's last record low was 68.8650 per dollar, hit on November 24, 2016.

Almost all Asian currencies across the board showed a fall, except Japanese Yen. Singapore dollar, Chinese yuan, Taiwan dollar, Hong Kong dollar, Malysian Ringgit and Chinese Rupiah – all were down. But naturally, we are more concerned with the Indian rupee as murmurs have now become a loud voice – all saying that Rs.70 to one US$ does not seem too farfetched now.

So as we track the rupee, let’s get a few basics right.

Why is the rupee falling?

When supply is high, more than the demand, price falls. And when demand exceeds supply, price rises. That in a nutshell, simplistically put, is the current story of rupee and US dollar.  Importers need dollars to buy and thus they sell rupees to buy dollars and when imports are high, rupee supply rises and thus its price vis-à-vis the dollar falls.

But is it just supply-demand factor?

Not really. The biggest factor currently at play is the rising price of crude oil and this is thanks to the geo-political developments. Oil yesterday settled at its highest since 2014. There is growing concern over US threats to sanction countries that don’t stop importing oil from Iran by Nov. 4. Thanks to this, the current account deficit is widening and at times like these, the safe haven to go to is always the US dollar. Basically, it is all sentiments at play and currently, the moods are somber and bad for the rupee. All Asian currencies are facing the pressure but India seems to be the worst hit.

Does this mean there is speculation at play?

Well, if it had been only speculation at play, then the RBI intervention would have helped. But the problem, mainly of sentiments is so deep rooted, stemming first from global risk aversion followed by not-so-good economic conditions in India. Maybe the rupee is pricing in a future shortage of dollars based on assumption that portfolio flows could get scanty.

Are FIIs on mass selling spree?

Yes, they always sell when the rupee falls as the value of their portfolio declines.  As per data put out by SEBI, in the month of June, till the 24th, FIIs have bought to the tune of Rs.94,000 crore and sold over Rs.98,000 crore; so they are net sellers. Cleary, they are selling more than buying – the rate hike in US and overall weakness in emerging markets has made them a bit wary at the moment.

How can RBI help at this juncture?

There isn’t much that RBI can do at the moment as even the little that it is trying to do is not helping. Usually, when the rupee gets into a free fall, RBI will buy rupees by selling dollars. But such artificial support could be more detrimental than beneficial. If the question was about increasing the supply of rupee, RBI could have printed money but how can it print dollars to increase its supply?

Is the world worried about the falling rupee?

Except for Indians and NRIs and the FIIs who have invested, the rest of the world gives two hoots about the falling rupee. And that is because, the Indian rupee is not held by other Governments in their reserves while the Chinese Yuan is. Thus a falling Chinese yuan is what causes world panic but not a falling rupee.

Does falling rupee raise chances of fuel price hike?

Every time the rupee depreciates, oil companies which import crude, end up losing when sold in the domestic market. For oil marketing companies with every fall in the rupee, the under-recovery on account of petroleum products goes up by Rs 9,500 crore per year on the price-controlled items. But this time around, crude oil is falling down faster than the falling rupee. So that gives the cushion while it also means that fuel price cuts with falling rupee will not happen.  

Are IT companies the best buys now?

Not really. Yes, there will be gains. For every percentage of fall in the rupee, Infosys gains 30-40 bps in terms of profits but at the same time, one has to look at the performance of its other currencies. So cross currencies and their net effect have to be taken into account; it is not a simple gains only situation. But yes, today, in absolute terms, IT and export oriented units are big gainers while those with major import components are losers.

Will the rupee fall further?

Most forex analysts expect the rupee fall to get arrested around the same levels though at the most, if it continues to fall, it could fall to Rs.70-71 in the next 12 months.

Clearly, people are flocking to the dollar as a reliable currency, strengthening of the US dollar is thus also a phenomenon of the overall global scenario and not rupee alone. 

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