Currency war: Rupee sailing against Yuan tide

Ever since the beginning of this year, stock markets and the Indian rupee have continued to slide. The Indian currency has been gripped by Bears in recent times as global markets went into another tailspin along with China’s yuan devaluation that has triggered a capital flight from the emerging markets.

Rout in rupee continues as it has breached the 68 level against the US dollar for the first time in 28 months, with a sharp sell-off in equity markets causing fears of dollar outflows.

The Indian rupee is on the slide

The Indian currency is basically following the weakness seen in the rest of the Asian currencies. China’s yuan devaluation has come up as a major factor, hurting the sentiments globally. China has been witnessing a slowdown, with the International Monetary Fund has reiterated and while slashing the global growth forecasts for the third time in less than a year. IMF has cited a sharp slowdown in China trade and weak commodity prices that are thrashing Brazil and other emerging markets.

So far this calendar year, the rupee has fallen 2.7 per cent against the dollar, triggering to a substantial capital flight from the local equity markets. Overseas investors have pulled out close to Rs 7,146 crore crore from the Indian equity markets since the start of this year.

However, if this selling pressure from FPIs persists till the global mood stabilises, the rupee would soon hit its 2013 record low of 68.85 a dollar and perhaps even further plunge towards 70.

Why sliding rupee is not a concern?

However, there is still a silver lining. The rupee is still relatively stronger against its trading partners and the Reserve Bank of India is well placed with the firepower in the form of over USD 350 billion in reserves to defend the sharp depreciation in the rupee if needed