Indian rupee falls

Background

This year the  rupee has fallen by 7 percent. Due to global markets remaining uncertain and the poor performance of the Indian currency, the Rupee has been termed as the worst performing Asian currency in July.

Analysis

Brent crude’s sustained gains since the middle of 2017 has led to a widening of the nation’s current-account and fiscal deficits at a time when global funds have become selective about their emerging-market investments. India relies on imports to meet about two-thirds of its fuel needs, and the International Energy Agency expects the country to remain the fastest-growing oil consumer through 2040.

Overseas investors have reduced holdings of rupee-denominated government and corporate bonds by $6.1 billion, and pulled $785 million from equities since the beginning of 2018. The withdrawals have made the rupee the worst-performing currency in Asia, spurring analysts to put out bearish forecasts.

Every $10 rise in the oil price worsens India’s current-account balance by 0.4 percent of gross domestic product, and pushes up inflation by 30-40 basis points, according to Nomura Holdings Inc.

Assessment

Our assessment is that India’s assets are caught in a vicious downward spiral, where capital outflows are hurting the currency, further deterring investment. Concern about the government’s debt sale and impact of the impact of rising crude prices on inflation have led to bond sell off at a time when investors are also pulling out of emerging markets because of higher Treasury yields. We believe that the rupee will slide past 70 to a dollar in the coming months.