USD-INR inching close to its all-time low!
Last updated: 20 Jun, 2020 | 10:43 am
- Indian rupee(INR) has continued to decline against the USD. The Indian currency has depreciated to the tune of 7.78% Year-To-Date.
- The exchange rate is inching close to its all-low of 76.97 which was hit on Apr 21, 2020.
Why has the rupee depreciated?
- FII's selling: Heavy selling by the FII’s in the Indian markets during the past few months has led to a steep depreciation in the currency. FII outflow from the equity markets for March and April totaled ₹ 68,857 crores.
- Risk off: Heightened political tensions in Southeast Asia i.e India- China & South Korea- North Korea is leading to the market fear and potential outflows of dollars across these countries.
- Flight to safety: With global uncertainty and slowdown and the greenback considered as a safe haven currency, USD has gained in the wake of the Covid-19 crisis.
- Rising Covid-19 cases: The acute impact on the economy due to the lockdown has resulted in uncertainty and nervousness among foreign funds across developing economies.
Rupee is not the only currency affected
- All the major emerging market currencies have faced the brunt of the Covid-19 induced market crash as risk aversion rose and USD was the major preference for investors.
- Brazilian Real has lost a whopping 30% because of heavy FII outflows, whereas Chinese Yuan and Indonesian Rupiah have been the best among the group with 1.75% and 1.66% depreciation respectively.
- While Indian currency has outperformed Brazilian Real, Mexican Peso and Russian Ruble, it has failed to do so with respect to its Asian counterparts.
How does this impact you
- Imports become expensive and exports become more attractive.
- Since our major import is oil, we pay for oil in dollars. A weak rupee means that oil becomes more expensive to import. Rising costs of oil means costs of food, groceries and manufactured products go up as transportation costs increase.
- It’s not all bad though, cheaper rupee is beneficial for export-oriented sectors such as IT and Pharma as they benefit from forex gains.Moreover, a weak rupee makes exports of the country more attractive and hence increases the export competitiveness of the country.
- Major industries affected by a weaker rupee are as follows:
- For the year 2019-20, India’s total exports stood at $528.45 billion against imports of $598.61 billion.
How will this affect investments?
- Overall, the slide in the rupee hurts the economy as we are large net importers of products and services. A weak currency makes our economy fragile and makes it a less attractive investment destination.
- India has a large amount of external debt (Debt from international financial institutions and foreign governments) and will need to borrow more to fund the stimulus measures to help the economy recover from Covid-19. The weakening of the rupee makes our debt even more expensive, increases risk of default and impacts our country’s sovereign rating (already near junk status)
- Overall risk of debt defaults in the economy remains high at a corporate-specific level. Sticking to high-quality AAA-rated debt is extremely important. In this scenario it is better to err on the side of caution.
- Both equity and debt markets are expected to remain volatile in the medium term
- You could hedge your portfolio by investing in the US markets directly in dollars. RBI allows for remittance of $250k per year outside the country.
- Invest in equities in a staggered manner. Keep your SIP’s running. Stick to large caps and index stocks that are best suited to navigate the economic crisis
- Stick to AAA-rated low duration funds and bonds over high duration funds at this point in time