In the year 2018, the Indian Rupee has witnessed high volatility. In a span of 7 months from April to October, investors dumped the currency, leading to a tumble of around 14 percent. Rupee showcased its worst performance on October 11, when it hit its all-time Intra-day low of Rs 74.45 a Dollar.
The Indian Currency had a decent start to the year, at 63.7 against the US Dollar. However, the US-China trade crisis led to tension in the currency market, that pulled the rupee down. Rising crude prices and widening the current deficit and rising demand for the US Dollar further added to the stress. Till the point of 68.85 level, the central bank (RBI) tried to guard the currency but later it adopted a protective approach to safeguard the reserves, as the rupee approached 70. The two simultaneous rake hike by the RBI can be seen as its defensive measure.
During the period of a first quarter of the current fiscal year, the Foreign Portfolio Investors pulled about US$ 11 billion by the sale of Indian asset which led to a surplus of Indian currency in the market. Another factor that also played a crucial part in the weakening of the national currency was India’s Current Account Deficit (CAD). The Current Account Deficit in the second quarter of the fiscal year 2018-19 expanded up to 2.9% of the GDP, against 1.1% in the year-ago period.
According to the Reserve Bank report: “India’s current account deficit (CAD) at $ 19.1 billion (2.9% of GDP) in Q2 of 2018-19 increased from $6.9 billion (1.1% of GDP) in Q2 of 2017-18 and $15.9 billion (2.4% of GDP) in the preceding quarter.” The expanding Current Account Deficit, which showcases the difference between outflow and inflow of foreign exchange in the country’s current account, projected a slowdown in the economic growth of the country, which resulted in the weakening of the Indian rupee.
The rupee has, however, witnessed an upward loop and gained strength, as it is now trading 71 against a greenback. Easing of crude coupled with the selling of the dollar by the exporters could be an important reason for the same. Recovery of the Indian stock market may further help in the improvement of the rupee.
