The Indian Rupee has hit an all-time low of Rs 69 per US Dollar. This has happened for the first time ever. Yes, it’s 69 Rupees = 1 Dollar for the first time in history.
The Rupee is Asia’s worst performer in 2018. Traders are calling Rs 69 per Dollar as a critical level. The Rupee could slip further even beyond 70 unless RBI intervenes and aggressively sells dollars.
This begs the question, Why is the rupee falling against the dollar? Why is the rupee Asia’s worst performing currency? Let’s find out?
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The rupee opened at Rs 68.89 an all-time low and soon fell further. The rupee then broke the all-important level of Rs 69 to a Dollar sending shock waves across the country. The rupee has depreciated by nearly 8% against the Dollar (Greenback) in 2018. Why is this happening?
In the month of May, the price of International Crude Oil was around $80 a Barrel. The price of Brent Crude is around $78 a Barrel, today. So why are International Crude Oil prices so high?
So how do high Crude Oil Prices affect India? India meets more than 80% of its Crude Oil needs through imports and is the third largest consumer behind the US and China. A single dollar rise in the price of crude will increase India’s import bill by Rs 10,000 Crores a year. The same thing happens for every 1 Dollar rise against the Rupee.
If you want to find out how interest rates will be in the medium term, take a look at the 10-year yields on Government Bonds (G-Secs). G-Secs for the month of June was around 7.86%. Yes, these yields are rising.
As yields rise, the prices of bonds fall. (Bond Yields are inversely proportional to Bond Prices). Higher yields increase borrowing costs for both the Government and Companies. This means lesser investments and the economy slows down.
India retained the fastest growing economy tag. Can it do so with High Crude Oil Prices?
Now, Trump wants to limit Chinese investments in the US. Trump is also threatening China with tariffs on US$450 Billion worth of Chinese imports.
China has threatened to impose tariffs on US$3 Billion worth of US imports which include pork, fruits and steel pipes. The USA has imposed tariffs on Indian Steel and Aluminum exports of $240 Million. India has also imposed tariffs of $240 Million on 30 US products in a tit-for-tat measure.
The US has imposed tariffs on imported steel and aluminium from the European Union, Canada and Mexico. The tariffs were 25% on Steel and 10% on Aluminum. The European Union has imposed a tariff of 25% on US Whiskey and Bourbon. Mexico will impose tariffs on US Pork and Canada on American metals, farm goods and other products.
So how does a US VS China trade war impact India?
The Indian Rupee is under intense pressure from High Crude Prices and a trade war increases India’s trade deficit causing the Rupee to lose value against the Dollar.
In the month of May, foreign portfolio investors sold more than 4 Billion Dollars of Indian equities and debt. The reason for this is rising US 10-year treasury yields which were close to 3% in the month of April.
Foreigner Portfolio Investors are exiting the Indian Bond and Equity markets as money rushes back to safe havens like the US. This is because of high US treasury yields. India and other emerging economies are feeling the impact as Foreigner Portfolio Investors exit emerging market economies and shift money to the US. High crude oil prices was another reason for FPIs to exit the economies of oil importing Nations like India.
To attract FPIs, yields on the Indian 10 year Government Bonds have to be raised. FPIs will invest in Indian debt only if there is a high interest rate differential, between yields on the Indian Government Bonds and the US Government Bonds.
In India and developing countries, the Government is the biggest investor in the economy. The Government issues bonds to meet its borrowing expenses, and if yields are high, the Government expenses rise as high interest has to be paid. This increases risk in the economy.
As FPIs exit from Indian Bonds and equity, there is intense pressure on the Rupee vis-a-vis the Dollar. High crude prices impact current account deficit, fiscal deficit, imported inflation goes up and the economy is in shambles.
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