Rupee, the Indian currency fell sharply against the US dollar
The Indian currency has fallen nearly 7.5%
Rupee, the Indian currency fell sharply against the US dollar, as the COVID-19 virus spread swiftly beyond China, posing a threat to the global economy and increased number of Coronavirus cases reported in the country. The financial markets are looking at it as a ‘black swan event.’
The economic fallout of the COVID-19 pandemic sent global investors scurrying to dump most assets, specifically emerging market holdings, and opt for cash and the relative safety of the greenback (dollar).
The Impact of Coronavirus on Indian Rupee
The Indian currency has fallen nearly 7.5% since the beginning of this year. On December 31, 2019, the currency closed at 71.38. It hit an all-time low of 76.92 and is likely to depreciate 5.7% further to 80.6 by end-June and by 7.2% to 82.4 by end-September per US dollar. Forex traders said the weakness in the rupee was largely due to the strengthening of the US dollar against a basket of currencies as investors fled to the formidable US dollar.
Why is the Indian currency weakening?
COVID-19 outbreak triggered the widespread economic uncertainty, the same as it happened in 2008 during the Global Financial Crisis (GFC). It has forced most of the world’s investors and businesses to seek to conserve the most crucial asset during times of crisis, and that is cash and, more precisely, the US dollar.
In 2008, the US dollar strengthened about 22% against the Euro as enterprises, especially in the world’s largest economy, hoarded the US currency.
Since the beginning, overseas investors dumped Indian equities and debt on a scale not seen since the taper tantrum of 2013, when the news that the US was going to wind down its GFC-triggered quantitative easing gradually spurred an exodus out of emerging-market assets.
As of March 20, foreign institutional investors (FIIs) had sold a net Rs 95,485 crore, or more than $12 billion, of shares and bonds. This outflow has coincided with the sharp fall in the key gauge of the equity market—the 30-stock S&P BSE Sensex, which has slumped 22% so far in March.
The key factors for Indian currency plunging to an all-time low
The primary driver of rupee to record low level of around 76 is the rapid outbreak of COVID-19 and its deadly contagion effect. Following that, foreigners have turned net sellers of Indian debt and equities, resulting in pressure on the Indian currency. Foreign institutional investors (FIIs) have withdrawn over Rs 12,000 crore from the Indian capital markets in the month of April. FIIs were net sellers on a single day as they sold shares worth Rs 2,095.23 crore.
The intense risk aversion has not even spared most perceived safe havens, including US Treasuries (government bonds) and significantly even gold. The investors are selling yellow metal, too, to hold the US dollar, the most liquid and most fungible of all assets.
“The Indian Rupee could start the session weaker against the US Dollar this Wednesday morning as risk-off sentiments in the markets continues to see investors flee to the safe haven US Dollar,” Reliance Securities said in a research note.
According to the report, Asian currencies have become weak against the US Dollar and will weigh on markets. It also added that Reserve Bank of India (RBI) is not seen intervening in the forex market to stem the fall in the value of the rupee.
Most currencies across the globe have weakened against their US counterpart. The dollar index, that measures the strength of greenback against a basket of six currencies, gained from 0.04 percent to 100.30.
Other than these, crude oil and emerging market currencies also play a major role in rupee’s fate.
Move on the part of the regulators and the equity market expectations
The stimulus measures that nations are implementing to counter the economic impact from the Coronavirus are the only respite to the market sentiment at this crucial time.
RBI offered a $2 billion swap to deal with the currency swings resulting from the extreme selling pressure witnessed all over the world. The recent economic data CPI and IIP may urge the Reserve Bank of India (RBI) to follow its global peers and lower benchmark policy rates anytime soon or at the next monetary policy statement. Taking cues from the Fed, Bank of Canada, Reserve Bank of Australia and Bank of England, too, cut their policy rates.
The equity markets have stabilized on the expectation to get support from central banks in the scenario that the rupee continues to depreciate, and governments would roll out more stimulus measures. The central banks, including the Reserve Bank of India, assured investors that they stand ready to take action.
Along with the RBI rate cut, the market focus will also be on fiscal measures from the government.
“Given the uncertainty surrounding the potential duration of the outbreak and the lockdown, we believe the RBI is unlikely to attempt a hard intervention that would risk quick depletion of its reserves,” said Abhishek Gupta, Indian economist at Bloomberg.
However, the RBI should curb market volatility and arrest the rupee’s depreciation.
How far will the Rupee fall?
The ‘black swan’ nature of the Coronavirus threat means the currency will follow the newsflow and will continue to react.
“It would be incorrect to put a target on the rupee exchange rate because it entirely depends on how the problem spreads and the numbers that will be reported in days to come,” said Samir Lodha, chief executive officer at forex consultancy QuantArt. If travel, offices, factories, conferences, shopping malls across the world, including India, witness reduced activity for many months, the rupee could weaken much further. In such a scenario, a move to below 75 against the US dollar can’t be ruled out, he said.
IFA Global Treasury Research Academy, a currency market consultancy, said: “If the disease spreads, it would compound the challenges for the government and the central bank who are already grappling with the weakest economic growth in seven years.”
Factors that may support strengthening Rupee in coming days
There are a few offsetting factors that offer just a little comfort. The Coronavirus headline will continue to dominate price action across all asset classes worldwide. The only factor that can support rupee is the reduction in Coronavirus cases all over the world that investors see a real recovery in the market and get over the uncertainty.
Oil prices, which have fallen because of a slump in global economic activity, may act as one source of respite for the rupee. The price of oil, which is one the largest contributors to India’s import bill, has dramatically declined. Since India is one of the largest oil-importing nations, lower oil prices indicate a more confined current account deficit for the country. When local stocks and equities are witnessing heavy outflows, as energy demand likely to remain depressed in the foreseeable future, the depreciation in the rupee was capped by falling crude oil prices.
India’s foreign exchange reserves are still at a fairly robust level and amounted to a total of almost $482 billion in March. The Reserve Bank of India (RBI) has stepped in every now and then, both to smooth volatility in the foreign exchange market and to ensure that a sudden shortage of dollar supply does not exacerbate the weakening trend in the rupee.
However, the US economy itself seems to go beyond a recession and possibly head for massive unemployment featuring depression. If more States join California in enforcing severe movement curbs to contain the spread of the viral pandemic, the dollar too could become a risky holding.
Who will benefit in a weak currency scenario?
All export-based industries will benefit from a weak rupee as exporters get more money for their exports. For instance, IT and Pharma companies benefit from a weak rupee as most of their revenues come from foreign countries.
What strategy should traders adopt in the current market conditions?
No one knows when the pandemic will end; therefore, the global scenario is still fragile. RBI has been trying best to cap the liquidity in the forex market, but more is needed to be done. Heavy inflows required to appreciate rupee towards 74 and lower levels. Currently, the market is very volatile and uncertain. The importers are hit badly in this scenario; thus, it is beneficial for them to be hedged.
Where does the Rupee go from here?
Given that the increasing possibility of the global economy heading into a recession has been a key driver of the dollar’s appreciation against other currencies, including the rupee, there is clearly more pain ahead for the Indian currency.
In addition, India’s own domestic economy has been struggling to reverse an extended slowdown. It is hard to see the sentiment on the rupee, improving appreciably in the short-term.
The investor’s nerves have been calmed for short-term; however, they will continue mulling over the spread of Coronavirus and the time when economies will be able to ramp up again.
Moving on, to complicate matters on the outlook, the RBI is most likely to cut interest rates in the very near future to support the sagging economy at this juncture, a move that could potentially again add to the downward pressure on the rupee.
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(About Author: Arindom is a professional writer, editor, blogger and a member of the International Association of Professional Writers and Editors, New York. A management postgraduate in finance with extensive industry exposure, he is associated with many reputed global online magazines and publications as a regular contributor. He loves to help his readers writing highly informative and well-researched investment-related content to make informed decisions.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of organization)