The Indian rupee today dived to a new all-time low of 70.52 against the US dollar. The fall in the value of rupee comes on the back of strong US consumer confidence data which rose to its highest level since October 2000. After Thailand's baht, the Indian rupee is the worst performing currency in Asia.
Credit rating agency Moody's today said that higher-than-budgeted oil prices will add to short-term fiscal pressures pointing to a higher risk that the government's deficit objective will not be met.
"Oil prices at current levels will raise expenditures and add to existing pressures on the fiscal position stemming from the lowering of goods and services tax (GST) rates on a range of consumer goods and a tax cut for small businesses as well as the relatively high minimum support prices (MSPs) set for this year," Moody's said.
Mustafa Nadeem, CEO at Epic Research said, "It was widely expected for the rupee to depreciate further as soon as it broke out the zone of 69.5-69.2. It has been consolidating in the July series and the break out that was witnessed was on the back of a higher volume and an indication of a new trend that may shape up in short term. Price action suggests it is similar to a flag which is a bullish continuation pattern and moves post breakout from this pattern are usually faster.
Rupee depreciation is mainly because of the recent rising tensions between China and the US. The trade war which was primarily shaping up to be for two countries has its implications for Asian emerging economies and the worst hit will be taken by them only. Rising crude prices and further sanctions on Iran is also a point of concern being the biggest exporter to India for crude oil. Depreciation may continue to come for INR as we expect upside to be towards $72, a further upside of 2% from current market price."
According to latest data released by the trade ministry, India's trade deficit hit a 5-year high of $18.02 billion in July, up 8.5 per cent month-on-month. This is mainly because of surging oil imports, which grew by over 57 per cent year-on-year to $12.35 billion. While total imports jumped 28.81 per cent to $43.79 billion, exports only went up by 14.32 per cent to $25.77 billion (year-on-year).
The widening trade deficit against the backdrop of growing global uncertainty is expected to keep exerting pressure on the rupee in the near term.
The far-from-optimistic outlook on oil prices makes matters worse. Unless our exports pick up substantially, this may worsen the deficit even further. That will make the rupee slide further.