MUMBAI: The rupee, which has depreciated more than 4.8 percent year to date this year has been the worst among its Asian peers throughout this year, plumbed a new low of 89.79 Monday and is nearing the sensitive 90-mark, weighed down by the sluggish trade and portfolio flows, coupled with the still missing Indo-US trade deal, overshadowing the blowout economic growth in the past quarter which printed in 120 bps more than the Reserve Bank’s projection of 7 percent. The rupee plunged to 89.79 against the dollar, dipping past its previous record low of 89.61 and the closing low of 89.49 on November 21.
Monday the unit closed at 89.755 to a dollar, down 49 paise from the previous close, and traders are resigned to see the beleaguered currency bleed more and test the 90-level sooner than later. The rupee has lost more than 4.8 percent so far this year, and 1 percent of that happened just in November when it first breached the 89 mark.
In fact, it is not that the rupee is depreciating against the dollar alone dollar. Between November 21 and 28, the exchange rate weakened against the dollar (from 88.64 to 89.46) and also against the euro (102.32 to 103.63), the pound (116.08 to 118.27) and the Japanese yen (0.5642 to 0.5720).The rupee's rough patch has brought down its 40-currency real effective exchange rate (REER), which is a measure of competitiveness, to undervaluation territory.
At the end of October, the measure stood at 97.47, according to RBI. A level below 100 signals that a currency is undervalued relative to those of its trading partners. Last week, the International Monetary Fund reclassified the country foreign exchange framework as a "crawl-like arrangement", noting that "while the exchange rate has exhibited increasing two-way movement this year, there remains room for additional exchange rate flexibility."
This has led the Fund to rate the country at C among the four grades of A-D. All these is in spite of the monetary authority deploying as much $38 billion to defend the rupee this year till September. “A calibrated rupee depreciation is both inevitable and desirable in the current macroeconomic environment," economists at JP Morgan said in a note.
The longer there is no trade deal, the greater the need for the rupee to fall so as to provide that offset, they added.
“It seems that commerce minister Piyush Goyal is just floating hot balloons about the near-closure of a trade deal with the US,” a forex trader told TNIE, fuming as his bets went astray today after the way the macro numbers came in and the weekend statement by the minister about a positive deal with the US a day or two came a cropper.
The massive drop came right after the government said the economy grew at a blowout level of 8.2 percent in the September quarter that exceeded all expectations including that of the RBI (7% forecast) and all analysts pegging at around 7.3 percent.
The rupee is the worst-performing currency in Asia this year despite resilience in economic fundamentals which have boosted shares to near record highs. The rupee would have bled more had it not been for the regular intervention from the Reserve Bank, traders say, pointing to the massive defence it had done so far this year—between January and September it sold as much as $38 billion in spot market to defend the rupee. Traders said the robust growth numbers has offered no respite to the rupee, as it is under pressure due to the lack of progress on a trade deal with the US, higher hedging by importers, and a widening balance of payments position.
Foreign investors have net pulled out over $16 billion from equities this year so far while merchandise trade deficit hit an all-time high of $41 billion in October as 50 percent US tariffs dented shipments to the largest export destination.