Rupee dives to near three-year lows as Trump, demonetisation weigh heavy

Indian Rupee (INR) had taken a massive hit since past two weeks, so much so that it has been trading above 68-mark against the US dollar for five consecutive days. On Wednesday, it settled at 68.506 per dollar highest since February 2016, up by 0.116 paise or 0.18%. 

Suresh Sadagopan, Founder of Ladder7 Financial Advisors said, “There is a flight of dollars away from Indian markets & hence dollars are strengthening. This is partly due to the fact that US interest rate is expected to move up and money from across the world may move into US investments.”

Anand James, Chief Market Strategist, Geojit BNP Paribas three events have pushed rupee so far.  He said, "The surprise US electoral outcome, that triggered a FII outflow into US anticipating expansionary policies by the new regime. Secondly, the demonetisation drive accelerated the equity sell off, putting further pressure on rupee by way of FII outflows. Thirdly, this period also saw a near 14% jump in crude oil prices."

Donald Trump win in the US presidential race came as a shock across the world. It was expected that dollar index will take a negative beating from the win of Republican party but somehow the situation has turned opposite.

Dollar Index has been trading at one-year high since the US election. 

Post the result from November 8 to November 18, currencies of 17 countries depreciated against the dollar with INR witnessing the median change of 2.64%, Care Rating said. 

James added, "The continuation  of dollar’s present surge will hinge on indications from Fed as to the pace of rate hikes post December meet."

Meanwhile, foreign institutional investors (FII) have continued to be the net sellers in both equity and debt market.  Data compiled by NSDL from November - till date, it was stated that FII have sold nearly $ 3649.48 million (above Rs 23,000 crore) in both equity and debt so far this year. 

Above factors have continued to hamper the rupee.

On the other hand, PM Narendra Modi's demonetisation method for curbing black money has also been one of the reason of rupee decline. Since the time of demonetisation, rupee has depreciated by 3.44% against dollar. 

Sadagopan said, "After  demonetisation, there is expected to be a deceleration in growth and GDP is expected to come down due to which some money has already moved out and more is on the way. "

Data compiled by Bloomberg shows, " Overseas holdings of Indian government and corporate bonds have plunged by 77.2 billion rupees ($1.1 billion) in November, set for the biggest decline since February, National Securities Depository Ltd. "

What's ahead? 

James of Geojit believed that performance of rupee will depend upon on Trump's  follow up on his electoral promises. 

He said, "How Trump will fare during his electoral promises will also have say in supporting dollar’s up  move. In this backdrop, the follow up action taken by the government, post the demonetisation drive will decide how attractive India would remain for FIIs, and that should have a say on rupee’s trajectory.”

Analysts at India Ratings added, " Moreover, portfolio investment outflows from domestic bond markets and the weak equity market will deepen the pressure on the rupee."