The Indian Rupee hit its all time low of 68.86 against US Dollar intraday today. This fall can be attributed to the continuous buying of the Dollar by the banks and importers. Since the demonetization, Rupee has fallen around 4%. Analysts expect the weakness to continue due to many factors. However, with the ease in liquidity crunch and FNCR redemption pressure, the currency may recover.
There are many factors that are contributing to the fall Indian rupee, major ones are:
US Fed Rate Hike
Analysts are expecting that US Federal Reserve will increase interest rates in its December policy meeting. As per recent surveys, the probability of US Fed Rate hike is more than 90%. Fed Chairperson Yellen also indicated rate hike during her senate hearing last week. This possibility of US Fed Rate hike is prompting money managers to book profits in emerging markets, including India.
Strong US Dollar
Good economic data has supported the rise in the US Dollar Index. Recently it hit a fresh 13-year high. Strong US Dollar directly impacts the emerging market currencies and increases the outflow of US Dollar. Indian Rupee and other emerging market currencies are facing turbulence due to the strong US Dollar.
Foreign Money Outflow
The strong fall in the bond yield in India as well as strong rise in bond yield in the US has caused foreign money outflow. India’s 10-year bond yield fell by more than 60 basis points, however, the US 10-year bond yield increased by more than 50 basis points in November. This bond yield fall has prompted FPIs to offload some of their holdings in India market.
The Reserve Bank of India floated a special FCNR deposits in September 2013 to calm the Rupee. This exercise controlled the Rupee volatility and raised around $29 billion. It is expected that FNCR redemption is scheduled for the second half of November. The redemption pressure of these deposits could create excessive US dollar demand. This, in turn is leading to the decline of the Indian Rupee.
Liquidity in the system
Due to the demonetization, the interbank liquidity has shot up considerably. This has weakened the Indian Rupee.