Sharp Decline in the Value of the Rupee Against the Dollar

New Delhi

A sharp decline in the value of the rupee against the dollar threatens the country’s credit profile, causing its deterioration. Since the first week of May, the value of the rupee against the dollar declined by nearly eight percent. Moody’s, an international credit rating agency, speculated that the Indian currency has declined because the economy has been weak.

The burden of India’s foreign debt is weighing on it. Additionally, since demands from oil companies increased Monday, the rupees have rolled downwards, reaching Rs 59.83. But, in the latter part of day, the banks selling dollars modified the situation and stopped the value of one US dollar at Rs 59.68. A weak Rupee undermines the credit-worthiness of borrowers. However, the situation has not declined enough that the ratings agencies need to review India’s rating. Constant decline of the stock market also weakened the value of the rupee. The end-of-the-month demand for dollars from oil companies strengthened the U.S. currency.

However, after signs of improvement in the U.S. economy, foreign institutional investor KEFAIA* is continuously removing its investments from Indian markets. So far in June, FIIs* have removed five billion dollars from domestic equity and debt markets. On Monday, the Reserve Bank, on the advice of some public sector banks, sold dollars in the market. Due to this, the value of the dollar decreased from Rs 59.83 to Rs 59.68.

Merrill Lynch needs to be convinced that, to prevent the rupee value from falling, the Reserve Bank can sell up to 30 billion dollars. Meanwhile, India Forex Advisors CEO Abhishek Goenka believes that the rupee comparison against the dollar is close to the bottom. Withdrawal of foreign investment from the stock market is weakening this situation. The cheap value of the rupee will affect domestic imports; crude oil imports will be particularly expensive and will create pressure on the treasury.

Therefore, the current account deficit is going into dangerously low levels. International agencies are now starting to estimate the reduction in the price of rupees. For this year, the international brokerage firm Standard Chartered estimates the price of dollar will rise from Rs. 53 to Rs 60.5.

*Editor’s note: KEFAIA Trade International is a German-based export company.

**Editor’s note: FII stands for Foreign Institutional Investor.