Rupee sinks to new two-year low

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SME Times News Bureau | 18 Aug, 2015
Devaluation in the Chinese yuan, stalled reforms process, falling exports and widening rainfall deficit dented the Indian rupee value on Monday which touched a new two-year low at Rs.65.33 to a US dollar.

The partially convertible Indian rupee ended Monday's trade at a new two-year low of Rs.65.33 to a dollar at the Interbank Foreign Exchange Markets in Mumbai.

The rupee had hit its lowest level in around 23 months on August 13 at Rs.65.23 to a greenback. It had ended last week (August 14) at Rs.64.99 against a US dollar.

Analysts said the devaluation of yuan, intended to boost Chinese exports, has made investment in China cheaper. This is leading foreign investments away from India.

China's central bank devalued yuan by two percent on August 11. This was the biggest devaluation in the Chinese currency since 1994.

The currency fell again by another two percent on August 12 panicking the world economy.

The measure to devaluate the yuan to arrest the implosion in the Chinese markets is seen as an attempt to corner international export markets from other emerging trading powers such as India and the Asean (Association of Southeast Asian Nations) grouping.

The move has also strengthened the dollar value, which has negatively impacted major world currencies including the Indian rupee.

"The Indian rupee continues to react negatively to the Chinese yuan's devaluation. The yuan has fallen by 4.6 percent till now since August 11," Anindya Banerjee, senior manager for currency derivatives with Kotak Securities, told agency.

"The Indian rupee has been very stable for the last six months due to the efforts of the Reserve Bank of India (RBI). Given the sufficient forex reserves with the RBI, the central bank will not allow the continuous slide in rupee's value."

The Reserve Bank has been pretty active in the forward purchase markets since the last 22 months. It used to sell dollars whenever the rupee crossed the Rs.64 mark and buys when it falls below Rs.63 to a dollar.

Though at a very short movement, RBI was seen comfortable that time with the rupee ranging anywhere between Rs.63.20-Rs.64.30 per dollar.

The RBI's strong control over the rupee had given the currency strength and resilience to withstand international financial crisis like the recent Greece debt issue.

"With the new reality of yuan devaluation, stalled reforms, deficient monsoon, high rates and the upcoming US interest rates decision, the RBI's range will be some where between Rs.64.20-Rs.65.30 per dollar in the short term," Hiren Sharma, senior vice president, currency advisory at Anand Rathi Financial Services told agency.

The world markets are fearful of the fact that the USD 10 trillion dollar-worth Chinese economy has the ability to dump unlimited amount of goods and services, thereby cornering the entire international exports customers.

"The Chinese have estimated that their currency is nearly 25-30 percent more expensive than its peers in the emerging markets. They have hinted at further devaluation to the tune of nearly 5-10 percent. However, that kind of move will be gradual," Sharma elaborated.

Experts further cited factors such as a sharp fall in July trade data, deficient monsoon rainfall and diminishing hopes of a rate cut coupled-with the upcoming decision on interest rates by the US Fed as other major reasons for the rupee's slide.

"The currency wars have started at a time when the world economy is stalling, commodities prices are falling, Chinese markets are bleeding and the world waits for the US to raise its interest rates in nearly a decade," Alex Mathews, head of research with Geojit BNP Paribas, told agency.