As growth sputters in the US and Europe grapples with options to solve its sovereign debt troubles, the Indian rupee has been badly hurt, hitting a 30-month low to 50.02/03 as it breached the psychological 50 to a dollar barrier on Friday.
The prognosis isn’t bullish as analysts expect it to fall further as the rupee moves uncomfortably close to its lowest ever level of 52.17 to a dollar recorded in March 2009.
“The eurozone crisis has made the euro weaker and investors are buying US dollars as a safe currency, leading to depreciation in other currencies including the rupee,” said Pramit Brahmbhatt, CEO, Alpari Financial Services, a firm that provides currency-related services to institutional and retail investors.
Around the same time last year, there was a surge in dollar inflows as foreign institutional investors (FIIs) parked money in Indian equities that fetched greater returns. This pushed up the demand for rupee as dollars were converted into rupees for investing in Indian bourses.
The reverse phenomenon is occurring now as FIIs are cashing out and diving into safer investment bets such as US government bonds. This is making dollars scarce and reducing demand for rupees.
Concurrently, the spurt in crude oil prices has pushed up demand for dollars, making the rupee to fall further.
Oil marketing companies recently raised petrol prices by R3 a litre as a falling rupee inflated their import bill.
The government has said that the weak rupee was one of the primary factors that has pushed up prices of most goods in recent weeks.