Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Indian Rupee A Whisker Away From All-Time Lows

The Indian rupee fell further on Wednesday, bringing it close to its all-time lows. The currency fell below a technically important level of 68.50 against the U.S. dollar, leading to a bout of weakness, said traders.

The rupee was trading at 68.63 against the dollar, down 0.6 percent compared to its previous close. The all-time intraday low for the rupee is 68.86 against the dollar—a level hit on November 24, 2016. The all-time closing low stands at 68.82, breached on August 28, 2013.

The Indian rupee has been weakening since the start of the year in response to a change in India’s macroeconomic environment. A wider current account deficit due to oil prices and portfolio outflows have been pushing the Indian currency lower. In the last few sessions, a depreciation in the Chinese yuan has also set direction for other Asian currencies. The yuan has weakened as trade tensions between China and the U.S. have persisted.

Higher oil prices over the last three trading sessions have also put pressure on the Indian currency. “The rupee extended losses owing to higher crude oil prices as well as strength in the U.S. dollar. It is expected to extend its losses in the backdrop of further gains in crude oil price,” said ICICI Securities in a note on Wednesday.

Besides the rise in oil prices, a sharp sell-off in the Chinese currency is also hurting the rupee, Viraj Desai, forex strategist at Emkay Global Financial Services told BloombergQuint. “Trump administration’s trade rhetoric fails to offer any comfort to the risk sentiment,” he added.

The 68.25-68.40 zone now becomes an important support level, while resistances come in at 68.80, followed by 69.00.
Viraj Desai, Forex Strategist, Emkay Global Financial Services

The Indian rupee remains the worst performer in Asia. At current levels, it has already depreciated nearly 7 percent since the start of the year. Peer currencies like the Philippine peso and the Indonesian rupiah have also depreciated this year by 6.7 percent and 4.3 percent, respectively. On a year-to-date basis, the Chinese yuan has weakened a more moderate 1.45 percent.

Analysts expect the weakness in the rupee to persist. Barclays is among the more bearish forecasters on the Indian currency and predicts that it will fall to 72 against the dollar by the end of this year.

“India’s wider current-account deficit, driven by higher oil prices and demand for capital import, will be increasingly difficult to fund, given the increased return competition posed by higher U.S. dollar rates for emerging market debtors,” Barclays said in a note last week.

As the rupee has depreciated, the Indian central bank has intervened to stem the fall in the currency. While the RBI maintains that it does not target a level for the currency, it does step in to stem volatility.

As a result of the interventions, the country’s forex reserves have slipped from peak levels. As of June 15, India had forex reserves of $410 billion compared to $424 billion in April. Despite the fall, reserves are enough to cover about 10 months of imports.

In an interview to BloombergQuint on June 7, William Foster, sovereign analyst at Moody’s Investors Service, said that India’s reserves are comfortable even though the current account deficit is expected to widen to about 2.5 percent of GDP in FY19.

“India is in a much stronger position than it used to be compared to 2013,” Foster said in the interview.

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