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The rupee is sliding on account of rising oil prices and FII outflows (Relevant for GS Prelims, GS Mains Paper III)

After a strong showing in 2017, when the rupee appreciated 6% against the dollar, the currency has weaken by about 4.5% so far this year.

Reasons for fall in value of rupee

  1. Rise in global oil prices: With global oil prices continuing a steady climb on the back of tight output controls marshalled by the Organisation of the Petroleum Exporting Countries, Brent crude futures have gained almost 12% through 2018.

This in turn has bloated India’s crude import bill and widened the trade deficit appreciably.

  1. Rise in bond yields in US: Foreign institutional and portfolio investors — who had pumped in close to $30 billion into Indian debt and equity in 2017 — have turned net sellers, with the pace of outflows accelerating sharply this month to more than $2.3 billion. The prospect of higher interest rates in the U.S., with the Federal Reserve having signalled last month that it is on course to raise the policy rate at least two more times in 2018, have now begun to firmly feed into investors’ expectations as well. This was best exemplified this week when the yield on the benchmark 10-year U.S. Treasury debt rose above 3% for the first time since January 2014.

Global trend
While the rupee is not alone among BRICS currencies to have depreciated against the dollar this year, with both the Brazilian real and the Russian rouble losing value, it remains particularly vulnerable to mounting oil costs given the economy’s extremely high dependence on crude imports to meet energy needs. Saudi Arabia, one of the world’s largest crude producers, is eyeing oil prices in the vicinity of $80 a barrel so as to be able to comfortably balance its budget and have cash to spare to fund Crown Prince Mohammed bin Salman’s ambitious socioeconomic reforms.

Important factors
The spectre of fresh tensions involving Iran if President Donald Trump walks his tough talk over the nuclear agreement with Tehran is also almost certain to prevent any significant softening in oil prices even if American shale producers increase output. Signals from the dollar index — a measure of the greenback’s value against a basket of six major currencies — too offer little reassurance to the rupee.

The index is close to its highest level since mid-January, indicating that investors see assets undergirded by the dollar as a strong bet. For now, the war chest of forex reserves the Reserve Bank of India has accumulated, $423.6 billion in all, remains the key bulwark against excessive currency market volatility.

What is Dollar index?
The U.S. Dollar Index (USDX, DXY, DX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, [1] often referred to as a basket of U.S. trade partners’ currencies. The Index goes up when the U.S. dollar gains “strength” (value) when compared to other currencies.

What is a ‘Greenback’
A greenback is a slang term for U.S. paper dollars. Greenbacks got their name from their colour.

(Adapted from The Hindu)

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