The rupee hit a fresh all-time low of 69.12 against dollar in early trade on Friday on rising demand for dollar amid upbeat comments on the US economy by the Federal Reserve chairman which drove the greenback to one-year high levels against global currencies. A fall in the Chinese currency Yuan also affected sentiment with traders monitoring the domestic stock market for further direction. The yuan dropped further by 0.28 per cent to 6.7943 per dollar, its lowest levels in a year following a rising slump in recent weeks as the trade war between US and China brewed. All Asian currencies weakened against the dollar on Friday morning, tracking the yuan which fell to a one-year low in the previous session.
The Indian currency plunged 7 paise in trade today compared to yesterday's record low close of 69.05 against the US currency. The currency opened at 69.01 level today
Forex market sentiment was affected as the Modi government faced its first no-confidence motion tabled by opposition parties in Parliament today.
Later, the rupee erased losses and gained 17 paise to trade at 68.95 level.
On Thursday, Indian rupee took a hard 43-paise knock to close below the 69 level for the first time at a historic low of 69.05 against the US currency.
This was the biggest single-day fall since May 29 and went hand-in-hand with a stronger US dollar.
The rupee had touched an all-time low intra-day low of 69.10 on June 28 but had recovered later on suspected RBI intervention.
Some other factors which led to the fall in rupee are:
Current account deficit
India's current account deficit (CAD) widened to $13.5 billion during the third quarter of 2017-18 from $7.2 billion in the second quarter and $8 billion in the corresponding period in 2016-17, according to Reserve Bank of India (RBI) data.
"The widening of the CAD on a year-on-year (y-o-y) basis was primarily on account of a higher trade deficit ($44.1 billion) brought about by a larger increase in merchandise imports relative to exports."
A higher CAD puts pressure on rupee as demand for dollar rises to make payments for the additional imports done for the Indian economy.
This leads to more dollar purchases by the government to pay its bills. That leads to a dent in the value of the local currency further.
Foreign portfolio investors (FPIs) withdrew Rs 5,776 crore via sale of securities in July so far.
During the last three months (April, May and June), foreign investors have taken out Rs 32,229.44 crore from the Indian market in search of better avenues for parking their funds.
The withdrawal has kept rupee under pressure after FPIs sought their investment back in dollars terms to park them in foreign markets.
FDI inflow growth rate fell to a five-year low of 3 per cent at $44.85 billion in 2017-18. In contrast, foreign inflows had grown by 8 per cent in 2013-14, under the previous government, albeit after recording a negative growth of 38 per cent in 2012-13.
The current government had managed to initially multiply the FDI inflow growth rate to 27 per cent in 2014-15 and 29 per cent in the following year, but it dived to just 8.67 per cent in 2016-17.
This led to a pressure on the Indian currency with demand for rupee falling in comparison to previous years.
Meanwhile, equity markets opened marginally higher in trade today.
While the Sensex rose 25 points to 36,377, the Nifty was up 6.40 points to 10,963.
At 9:59 am, the indices gained momentum with the Sensex trading 135 points higher at 36,487 and Nifty heading toward 11000 level, rising 40 points to 10,998.
The equity markets opened on a cautious note as all eyes would be on the Lok Sabha where Bharatiya Janata Party-led NDA government would face the trust vote. While this provides PM Modi an opportunity to show his strength, the Opposition hopes to convey the message of a growing unity against the government ahead of the 2019 Lok Sabha election.
The debate on the no-confidence motion will be conducted throughout the day in the Lok Sabha, followed by a vote on the motion at the end. No other matter will be taken up in the house.
Written by Aseem Thapliyal