Its shocking to see Rupee’s free fall from 65 to 70,& within last few days to 72 today, against USD. Some of the key reasons which are supporting this downfall, are international events. Experts fell that this volatility will continue for some time to come (one to three months) and stability by Mar-19 or earlier, where Rupee to become stable or under 69.
Some of the key events:
USD & Crude Gaining Strength: USD is gaining strength back home with quantitative tightening & interest rates, leading to drying liquidity. This easy money earlier was chasing emerging market assets (in order to generate higher returns). Rise in crude prices on the other hand is playing spoilsports.
Trade War Concerns: US & China is at war, with US proposing tariffs on USD 200bn worth of Chinese imports in August. This sparked depreciation in CNH to the extent of 11.2% since Mar 2018 (1st time since US proposed tariffs). CNH depreciation makes the goods of other emerging markets less competitive, and thus stokes fears of a slowdown in trade of other emerging markets.
Emerging Markets Contagion: Argentina is going thru a rough phase, with new government, public borrowing has gone up by 50%, and they have USD 25bn debt maturity this year. They have asked IMF USD 50bn to bail them out. Similar round is happening in Turkey, with public debt at 233% of GDP, USD 179bn maturing in 1 year and worsening US relations.
Domestic Factors: Political uncertainty with elections around the corner, CAD/ fiscal health with negative FPI flow, & crude gaining, all are putting pressure on the Rupee.
Factors in favour: RBI intervention, with comfortable reserve (upward of USD 400bn), inflation under control, domestic recovery & possible corrective measure (with IMF help) in Argentina & Turkey.