Rupee has come under Intense Selling Pressure

The rupee has come under intense selling pressure in recent weeks due to a perfect storm of global headwinds, which analysts believe will continue to pummel the Indian currency in the months ahead as well. Earlier in July, rupee tested record lows and breached the Rs 80 per US dollar level at least twice, recovering only after the Reserve Bank of India (RBI) stepped in to stem the depreciation. Since then, the rupee has regained some ground and has been trading in the 78.50-79.80 range. One of the reasons behind the rupee’s fall was strong demand.

The emerging market currencies including Indian Rupee, Thai Baht, Chinese Yuan, and South Korean Won have been depreciating against the US Dollar since the beginning of the year with a level of depreciation in the range of 5-9% since the beginning of the year. The currencies of the East European Region, Turkey, Argentina, and Egypt have seen higher depreciation, in the range of 15- 25%. India’s widening current account deficit is expected to remain a continuing drag for the rupee going forward as well. “While India faces a widening trade deficit that works against the local currency, any revival in the fortunes of the Rupee is dependent on the return of overseas investors into the domestic equity market,” Emkay Wealth Management.

A host of financial and geopolitical developments affected currency performance worldwide. The US Dollar strengthened to its highest level against the Euro in the month of July. Likewise, the dollar strength led to the rupee depreciating to its weakest level of 80/$. The rising trade deficit also played its part in the INR fall vs the USD, according to the portfolio management services firm. After rising to its high, the American currency has cooled off a bit. The softness in the greenback is largely due to the fall in the prices of Brent crude to its lowest levels since February.

Crude prices have weakened also due to the lockdown and lower demand from China and the expectation of Iranian oil returning back to the global market. “The UK political scenario is currently undergoing some major changes. There is quite a bit of uncertainty around the situation after the resignation of the Prime Minister, and the process of electing the new Tory leader is underway. Once the election is over, and the policy pronouncements or till at least a sense of that emerges, the Pound Sterling may not be able to regain ground,” said Emkay Wealth Management in its note. Meanwhile, the Euro is struggling to stabilize amid the European gas crisis as the supply of gas is only to the tune of 20% of capacity from Russia’s Nord Stream1.

Analysts believe that these factors generally present a case for the US Dollar in the immediate term. “The US Dollar Index is trading in the range of 105-108, and its projected target is 109.30, though one may see some intermittent periods of the index falling and then rising, it is generally expected that the US Dollar Index is north-bound.

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