Why the Rupee is among biggest losers over the past few weeks

The Indian Rupee hit a nine-month low of 75.4 against the US Dollar on Tuesday and has lost nearly 4.2 per cent over the last three weeks — one of the biggest losers among the emerging market currencies. The Rupee came under severe pressure over the last three weeks in line with the sharp rise in Covid-19 cases and RBI’s announcement, last week, to maintain fairly accommodative monetary policy and that it will inject liquidity through the Government Securities Acquisition Programme (G-SAP) programme — starting with Rs 1 lakh crore in the current quarter. As concerns are growing over the delay in recovery of the economy and normalisation, the Rupee has taken a hit.

How has it fallen and how does it compare to other currencies?

From trading at a level of 72.38 to USD on March 22, the Rupee slipped to levels of 75.42 on Tuesday (afternoon trading hours) thereby witnessing a decline of 4.2 per cent in a matter of three weeks. On Tuesday, it lost 43 paisa to a dollar, hitting a nine-month low. Data shows the Rupee has been one of the biggest losers over the last three weeks as concerns are growing over rising Covid cases and its impact on economic activity across the country.

The Rupee has been one of the weakest emerging market currencies over the last three weeks as has lost 4.2 per cent since March 22 against the dollar. In the same period, only the Turkish New Lira has lost more than the Rupee as it declined 4.36 per cent against the dollar.

While Brazilian Real has lost 3.99 per cent in the same period, Russian Ruble has weakened by 3.25 per cent. Thai Baht and Indonesian Rupiah have lost 2.33 per cent and 1.5 per cent in the same period against the dollar.

What are the key reasons for the decline?

Rising Covid numbers — over 1.6 lakh fresh daily cases — have emerged as a key concern. As several states are now considering more stringent lockdown measures, market participants are concerned over delay in the recovery of the economy, that was hit hard in 2020-21 by the pandemic.

Besides, the strengthening of dollar in line with expectations of better growth in the US economy, has also put pressure on the Rupee. While the Dollar was trading at 1.233 to a Euro in early January 2021, it is currently trading at 1.189 to a Euro and has gained over 3.5 per cent. Since March 1, 2021, the Dollar has gained close to 1.5 per cent against the Euro.

Last week, RBI’s announcement of G-SAP programme to infuse liquidity has also put additional pressure on the Rupee. This is being read as a sort of quantitative easing policy the global central banks had followed, in which the RBI will support the government’s elevated borrowing programme through infusion of liquidity.

Another factor that is putting additional pressure is the dwindling support of the foreign portfolio investors, who pumped huge inflows into Indian equity markets between October and February. While the FPIs invested a net of Rs 1.94 lakh crore between October and February (in the Indian markets) in the month of April they have pulled out a net of Rs 2,263 crore (till date).

Is the weakness likely to continue?

Market participants say the Rupee may hit levels of 77-78 over the next couple of months and that can be a cause of concern for importers, or other individuals who have planned expenditure in foreign currency.

With Covid numbers rising as of now, it continues to pose a threat to the pace of recovery and that is raising concerns over INR. A concern over economic activity and growth of the economy in turn is slowing down the pace of FPI inflows which provides a strong support to Rupee.

Many feel that with the country looking to push manufacturing and exports, RBI too may not intervene to arrest the decline of the Rupee, if it is gradual. So there is a sense that while RBI may step in to curb high volatility, they would not step in for a gradual decline.