Rupee vs USD war

Prepared By:
Courtney Tapiwa Mugodi
BBA VI
Introduction
• The Indian rupee on Thursday, 28 June 2018, collapsed to the all-time
low value against the US dollar at the foreign exchange market and
broke 69 per USD level for the first time in history.
• The rupee has fallen more than 7% against the US dollar since January
2019.
• Now the exchange rate between the dollar and rupee is hovering
around Rs.72.51= 1 dollar.
Reasons Why The Rupee Is Dropping
1. Dependency on oil import
2. Huge current account deficit
3. US Fed (Federal Funds) rate changes
4. The global market
5. Foreign Portfolio Investors
Dependency on oil import
• India is the third largest crude oil importing country in the world,
coming only after US and China.
• India imports more than 80% of its crude oil requirements, thereby
making it more vulnerable to changes in the international oil market.
• For example, if the crude oil prices increase, our total import cost will
also increase, affecting our current account balance which in turn
affects the currency market.
Huge current account deficit
• In June 2018, India’s current account deficit rose to 42%, approximately
$160 billion. Current account deficit is the difference between imports and
exports of goods and service of a country.
• A huge dependency on crude oil imports and its increasing price, as
mentioned before, affects our current account health, making the deficit
larger.
• An increasing current account deficit (of India) leads to an increase in the
demand for Dollar.
• An increase in the demand for a currency leads to its appreciation. And if
the US Dollar is appreciating against Indian Rupee, it means our domestic
currency is depreciating.
US Fed (Federal Funds) rate changes
• Since national economies share an intricate bond, the effects of US
Fed rate hikes are felt in the Indian market as well.
• A hike in the fed rates (as was observed four times in 2018),
strengthens the US Dollar, which in turn leads to a depreciation of the
Indian currency.
The global market
• The United States and China have been experiencing a trade war in
2018.
• As both are among the world’s largest economies, the trade war is set
to affect the global economy.
• While the ball could fall on either side of the court for India, the
situation has definitely created a growing unease among global
investors and Indian economists.
Foreign Portfolio Investors
• FPIs (Foreign Portfolio Investors) have emerged as net sellers in the
first two months of FY19 and have already sold-off around Rs 14,000
crore worth of equity and debt securities in this month so far.
• “So far foreign investors have pulled out over Rs 14,500 crore from
Indian capital market this month.
• Adding pressure to Indian Rupee is strong month-end dollar demand
from importers and banks,” Bhavik Patel said.
The End