Mumbai: The Indian rupee fell to a lifetime low in trade as a confluence of factors ranging from a stronger dollar, to higher oil prices, a wider current account deficit and foreign portfolio outflows pushed the currency lower.
The rupee fell to 69.09 in intraday trade compared to Wednesday’s close of 68.63. The previous all-time intraday low for the rupee is 68.86 against the dollar—a level hit on 24 Nov, 2016. The all-time closing low stands at 68.82, breached on 28 August, 2013.
So far this year, the Indian currency has weakened 8.1 percent, making it the worst performer in Asia.
The Current Account Deficit Club
If in 2013, currencies of economies labelled as the ‘fragile five’ were worst hit, then in 2018, the market appears to be punishing current account deficit economies.
Pressure of currency depreciation started with countries like Argentina and Turkey.
However, the pressure has filtered through slowly into other economies with widening current account deficits, noted JP Morgan in a note dated 19 June.
It is increasingly clear that emerging market current account deficit (EM CAD) economies are being clubbed together as an asset class and therefore at risk of some contagion from each other. Just being an EM CAD country in this environment makes one vulnerable to redemptions and outflows.
In India’s case, the current account deficit is expected to widen to 2.5 percent of GDP in FY19. While this is below the 3 percent mark, which is typically seen as unsustainable, the combination of a wider current account deficit along with capital outflows could put pressure on India’s balance of payments. Foreign portfolio investors have sold over Rs 46,000 crore in debt and equity so far this year – the most in a decade.
Reserve Bank of India governor Urjit Patel, in a recent editorial in the Financial Times, warned of dollar funding drying up for emerging market economies. In his view, higher borrowings from the US government against the backdrop of reduced liquidity due to the unwinding of the US Federal Reserve’s balance sheet will mean that emerging markets could face a ‘dollar double whammy’.