The Indian rupee, which has continued to trail the dollar for many months now, isn’t showing any signs of recovery, at least in the meantime. Thursday’s trading session saw the rupee come under heavy selling pressure against a resurgent dollar. Thursday’s trading session saw the rupee edge lower to trade at 79.44 against the greenback. It is now nearing levels seen last week when the rupee dropped to as low as 79.16 on Wednesday.
Much of the rupee’s woes have stemmed from the country’s trade deficit which has become a cause of concern for investors. With today’s performance, investors now have their sight on the Reserve Bank of India’s monetary policy decision expected sometime this week.
India’s July trade deficit isn’t encouraging, especially with the country’s trade deficit widening to a staggering $31.02 billion from a meager $10.63 billion a year ago. Reports have now emerged that the country spent more on coal and crude oil import. This is the reason for India’s widening trade deficit.
According to Dhiraj Nim, a renowned exchange strategist working with ANZ Research, a widening trade deficit such as the one currently reported by India is a problem for the country’s currency. This is because it creates more demand for dollar funding, especially with portfolio inflows drying up and the country experiencing record outflows.
Government’s intervention to boost the falling rupee
With the recent trade data deficit along with the poor performance of the rupee against the dollar, analysts expect the reserve bank to raise interest rates by at least 50 basis points.
Experts believe a 50 basis point interest rate hike by India’s central bank will boost the rupee as it would forestall a sharp narrowing of the interest rate differentials. Nevertheless, analysts say that the Indian inflation risk is still very real, and government agencies must continue their intervention to ensure the country doesn’t collapse.