Rupee is fighting against multiple adversaries

Amidst the chaos in the international market and rising crude price trends, the rupee recorded further slippage against the Dollar on Monday. At the close of trading, the national currency was trading at Rs71.21 against the Dollar; recording a daily loss of 21 paise.

In the beginning phase, rupee got strength from positive GDP data but recorded losses when unpleasant news in the form of crude price rise surged in.

A more worrisome trend is the tension spread into the equity and debt markets. As the Brent crude figures went up to $78, the market sensed rising current account problems for the economy and foreign investors sold considerable holdings. As a result, the indices fell by more than 1%. The sensex recorded a daily loss of 330 points.

Other emerging market currencies have also undergone notable decline against US Dollar. Leading the pack is the Argentinian Peso and Turkish lira- the two countries are having severe balance of payment problems. Currencies of major EMEs – Brazil, South Africa, Indonesia, Russia and even China got affected by the current tide.

The threat of current account problems out of rising crude prices is the major factor that caused weakening of rupee. Once crude prices goes up, it may bring macroeconomic pressures like inflation, fiscal problems etc. Foreign investors are apprehensive of such crude price driven negative factors and are making mild exit.

The selling by FPIs in the equity and bond market brings further depreciation. For India, if the crude price rise is a current account issue, the exit of the FPIs is the capital account factor that weakens the currency.

And most importantly, the equity markets of emerging economies are working in the overcast condition of increased US interest rate which always encourages capital outflow back from the EMEs to the US.