Rupee closes below 70 for first time on trade war fears

The rupee dropped to Rs 70.39 in early Thursday trading

Updated : Aug 17, 2018, 05:40 AM IST

Rupee closes below 70 for first time on trade war fears

The Indian rupee for the first time closed below 70 mark against the dollar on Thursday at an all-time low of Rs 70.15. The greenback continued to appreciate with investors, fearing a global trade war, continued to flock to safe-haven destinations like the US Treasury. With US the Federal Reserve on a rate tightening mode, foreign investors are likely to leave emerging markets even after the Turkish lira hangover ends.

The rupee dropped to Rs 70.39 in early Thursday trading, breaching the earlier intra-day low of 70.08 hit onTuesday, but some of the losses were curbed after a mild intervention from Reserve Bank of India. The rupee has dropped 2.29% so far this month. The 9.3% fall in the unit this year has already led to a surge in local prices of goods with an imported component. But the government remained unperturbed as the rupee continued to fall to new record lows.

Niti Aayog vice chairman Rajiv Kumar said the Indian currency was overvalued and is moving towards its real value, and that it will not hurt the Indian economy. In a tweet on August 16, he said, "Let's be clear, the depreciation of the Indian Rupee against the USD is not indicative of a bad time for the Indian economy. Over the past three years, the rupee has been overvalued by approximately 17% and the current depreciation of 9.8% since January is a move towards its natural value."

The gap between India's exports and imports touched a five-month high at $18 billion in July as imports outstripped exports.

India has a huge imports basket with major imports being oil, electronic goods such as mobile phones, gold; the oil import bill is expected to cross $600 billion in this fiscal from $565 billion in last. High imports are creating a trade imbalance with imports exceeding exports, leading to a shortage of dollars in the domestic markets.

But currency experts say that not all is lost for the rupee.

"I don't expect too much of depreciation from here. A depreciation up to Rs 71 to the dollar is the outer limit. The trade deficit numbers were high, but that was due to high gold imports which will be contained by the government. Fundamentally, the rupee is suffering due to global factors," said Bhaskar Panda, senior, regional head, treasury advisory group, HDFC Bank.

But the macroeconomic situation is also posing a threat for the local unit, especially in a pre-election year when fiscal slippage is very much a possibility.

"Deteriorating macroeconomic imbalances are again posing a concern, said Tanvee Gupta Jain, economist, UBS Securities India. There is a risk that the central government may breach the fiscal deficit target of 3.3% of GDP by at least 0.20% in fiscal 2019 unless it adjusts expenditure or non-GST revenue collection is higher than budgeted, Jain said.

Meanwhile the government is banking on RBI's foreign exchange reserves, which stood at $402.70 billion in the week ended August 3, to stem the rupee fall.