Rupee breaches 69 vs dollar for first time: Reasons behind rupee's free fall

Investors are growing more nervous that higher crude oil prices will worsen India's current account deficit and fuel inflation.

Rupee breaches 69 vs dollar for first time: Reasons behind rupee's free fall

New Delhi: The embattled Indian Rupee rupee collapsed to a lifetime low of 69.10 against the US dollar by plunging 49 paise on Thursday.

Investors are growing more nervous that higher crude oil prices will worsen India's current account deficit and fuel inflation. Traders are however hopeful that the Reserve Bank of India (RBI) would step in to prevent further losses in the currency.

Here are the reasons behind rupee's free fall

  • Consistent dollar demand from banks and importers, mainly oil refiners, following higher crude oil prices kept the rupee under pressure.  The US has told India and other countries to cut oil imports from Iran to "zero" by November 4 or face sanctions, making it clear that there would be no waivers to anyone. Iran is India's third-largest oil supplier behind Iraq and Saudi Arabia. Iran supplied 18.4 million tonnes of crude oil during April 2017 and January 2018 (first 10 months of 2017-18 fiscal).
  • The currency market was nervous after RBI painted a gloomy picture of the banking sector in its bi-annual financial stability report. Higher inflation, concerns over fiscal deficit and hawkish stance from the RBI have driven up bond yields, hurting bond prices. The 10-year benchmark bond yield shot-up to 7.87 percent from 7.83 percent.
  • Currency traders were also worried about the future of global trade against the grim backdrop of an escalating trade rhetoric between the US and China. Markets remain anxious about Trump`s hard-line approach to trade relations, with early signs his stance may not only be backfiring on him but also hurting the global economy.
  • A massive selloff in domestic equities further added pressure fearing heavy capital outflows. The 30-share index, which had lost 272.93 points in the previous session, today fell further to 35,126.85 and the Nifty dropped to 10,640.10 as investors remained cautious on the expiry day of the June series derivatives contracts.

 

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