India’s rupee fell to an all-time low of Rs70 to the dollar on Tuesday as emerging market jitters grew following the Turkish lira’s big falls in recent days.
The rupee weakened to touch the psychologically significant Rs70 mark in early morning trading, a day after a much steeper fall, reflecting investors’ concern about India’s widening trade and current account deficits.
On Monday the rupee fell 1.58 per cent against the dollar, closing at 69.93, its worst single-day performance in five years.
Analysts said that the turmoil in Turkey— which sent the lira down 13.8 per cent on Friday and 6.3 per cent lower on Monday before rebounding early on Tuesday — had once again placed the spotlight on countries with large current account deficits, including India.
India is also a net oil importer that was hit hard by the sharp rise in oil prices this year.
“As far as the rupee is concerned, it’s all about the current account deficit,” said Sriyan Pietersz, a Hong Kong-based strategist at Matthews Asia, the fund management company. “For India, high oil prices are the kiss of death.”
In June, India’s trade deficit widened to $16.6bn — the highest level in five years, fuelled by buoyant oil prices.
With its import bill surging, Mr Pietersz said India needed strong portfolio inflows to help fund its current account deficit. But he said “capital flows have been pretty volatile since the end of January this year”.
US interest rate increases and the stronger dollar have prompted investors to pull funds out of riskier emerging market equity funds in the 10 weeks to the end of the July, according to fund data provider EPFR.
After touching Rs70 in early trade, the rupee recovered slightly in later trading to 69.8. But the currency has fallen more than 8.6 per cent this year, making it one of Asia’s worst performing currencies.
The weakening of the currency is politically awkward for Prime Minister Narendra Modi, who was scathing about the then incumbent Congress-led government in 2013 when the rupee plunged sharply during the global taper tantrum.
He and his Hindu nationalist Bharatiya Janata Party had vowed to oversee a strengthening of the rupee, which they said would reflect India’s economic strength.
However, some analysts and industrialists said on Tuesday that a weaker currency could be positive for India, particularly boosting its stagnant exports and encouraging more manufacturing investment.
“Instead of bemoaning its fall, should we view this as the ‘Make in India moment,’” Anand Mahindra, executive chairman of the Mahindra Group, tweeted on Tuesday.
Mr Pietersz also said, “frankly, from a competitiveness point of view, I don’t think that 70 would necessarily be such bad thing”.
Analysts also said investors had little need to panic, given that the Reserve Bank of India, the central bank, had accumulated foreign currency reserves of more than $400bn. The RBI had spent about $23bn intervening in foreign currency markets this year to manage the rupee’s gradual depreciation.
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