This weekend, the Indian currency fell to a record low in trading. The fall was due to the continued flight of investment money fearing continued US dollar value shrinkage as well as rumors of European Union disintegration. Aside from these global events, India’s rising domestic inflation rates are also putting a dent on the inflows of overseas funds.
The record low is Rs 54.30 and this may be surpassed in the near future. This may worsen the export trade position of the country as the demand continues to lower in debt crisis hit Europe together with a high volume of imports into the country cushioned by increasing international prices.
According to financial advisory firm Basix Forex’s Director KN Dey, “There is all around pressure on the rupee. RBI is trying its best with all its arms and ammunitions to arrest the rupee fall, but the government needs to take action to boost the sentiment of foreign institutional investors.”
The rupee fell by as much as 0.6%, closing at a record of Rs 53.957 to the US dollar. In the international money market, the US dollar has rallied compared to other currencies, especially after the failure in the formation of a coalition government in Greece. This single event has but a great risk on the international financial system, where the Euro fell to US$1.283 in trading.
This has far reaching effects, as international investors purchase US dollars as a cushion against any further currency falls especially in Europe. Because of the continued failure to form a coalition government, Greece is sure to be removed from the European Union currency. This may precipitate other weaker currencies such as Portugal, Spain or Italy to be cut off from the Union.
According to a strategist from the National Australia Bank, “Greece’s exit from the Euro is becoming more and more a mainstream discussion, and this is potentially destabilizing for markets.” The remarks were made by Emma Lawson, a currency strategist for the bank during an interview by Bloomberg News.
The effects of further falls for the rupee include the increase in the value of overseas debts by Indian companies as well as fan the flames of domestic inflation. This can force the RBI to further intervene, this time more aggressively, such as funding oil importation with the current US$295 billion of the country’s foreign exchange reserves. The daily demand amounts to $500 million a day and without the currency inflows from overseas, this can further pull down the value of the Indian currency in the world market.