Indian Rupee fell to year’s lowest today and WhatsApp forwards started pouring in. Some of the WhatsApp forwards really triggered me – one of them said how eating at Mc Donald’s, buying Chinese products and using MNC products is causing the economy to decline and rupee to fall. Interestingly, the group members cheered the message and appreciated without thinking anything about domestic and global factors that is dragging rupee down against the US Dollar.
So, if you really do not know why rupee is falling against the US Dollar, here are some of the real reasons and factors that are triggering the great fall of the Indian Rupee:
The Capital Withdrawal by Foreign Portfolio Investors (FPI)
Over the past two months there have been huge outflows from the Indian Equity Markets which has hit the valuation of the currency severely. After the finance minister in her July Budget hiked tax on ultra-rich in the Budget, the Foreign Portfolio Investors went into selling spree. In the past two months FPIs have withdrawn over $3 billion from Indian markets despite being net buyers of shares worth $11.33 billion till June.
In July, Nifty and Sensex, shacked 5.69% and 4.86% respectively and in August both the indices are down over 2% each. However, now that the government has withdrawn the added surcharge on capital gains (as on August 23rd), it will provide some relief to FPIs. This move is believed to help in reversing some of the FI outflows.
China’s Devaluation of Yuan
On August 5, 2019, the People’s Bank of China (PBOC) set the China Yuan’s daily reference rate below 7 per dollar for the first time in over a decade. Although, currency devaluation is nothing new, China’s devaluation is problematic to global economy especially now that China is world’s largest exporter, and any fluctuations it makes to the macroeconomic scenes have huge consequences.
So, devaluation of Yuan effects all Asian currencies including Rupee. In fact, the Indian rupee is the worst-affecting currency after Yuan breached a key level against US Dollar. India and China compete in numerous industries including apparels, metals, chemicals and textiles. A weaker yuan means further additional competition to Indian exporters with lower margins. China’s recent moves just like 2015 continues to send swells across global financial systems, and rival economies including India is facing the repercussions.
Higher Oil Price
Rising crude oil prices have put a huge pressure on the rupee as they push up the cost of the oil import and broaden India’s trade and currency deficit. Now that India heavily relies on imported oil and gas, the impact of rising oil prices has increased India’s oil import bill significantly. This is one of the reasons too why Indian rupee as well as India’s trade position is deteriorating.
According to a data published by the Petroleum Planning and Analysis Cell (PPAC) India’s crude oil import bill in the financial year 2018-2019 is expected to jump 24% from $88 billion to $109 billion from the last fiscal year.
The Trade War Between China and the US
There is a trade war going on between the US and China. The war has led to the rise in price of the imported commodities which is why there is also an increase in the outflow of the US dollars from the Indian market.
Now that we all know that Indian import bill is always greater than its export bill, it is likely that the trade war will adversely affect the Indian market and this is the reason why India is also experiencing the outflow of US dollars from its domestic market, thus causing the fall of the Indian Rupee.
At the economic front, things really seem to be crucial for rupee. While, I’m not buying the panic, I’m surely buying the fall of the rupee.