The Rupee has been having a low performance since the end of last month and at the start of this month. Many economists like the CareEdge chief, Madan Sabnavis, stated that the rupee is expected to fall due to the trade deficit and capital flows being weak. This was later confirmed by the closing of the rupee at a 20 month all time low. The Rupee fell 36 paise and reached a low of 76.23 against the dollar. This occurred due to several reasons.
The pandemic caused the largest buyer in the forex trading market, students who are aspiring to study abroad, to have a fading presence in the market. Decreased demand combined with the strengthening of the dollar have weakened the Rupee. Furthermore, predicted increased depreciation has been materialised through the slowdown in China. This resulted in the strengthening of the Yuan vs the Rupee, giving the rupee a final push down, towards the mark of 76.
The closing of the year also needs to be considered as many traders are selling their investments in currencies, adding salt to the wound of the Rupee's declining performance. The Indian forex reserve decreased by a lump sum on December 10th by $77 million (Rs. 585 crores). The reserve mainly consists of foreign currency assets (FCA), special drawing rights (SDR), gold reserves, and the nation’s reserve position with currency the International Monetary Fund (IMF), all of which took a blow. Supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF).
The main culprit for this loss were the FCAs, which faced a reduction of $321 million. The SDRs faced a similar loss, being $37 million. The losses were cut back slightly by the growth in the IMF’s, of $10 million. The impact was mostly mitigated by the growth in the gold reserves by $291 million. Traders are overall possessing a bleak and discontent mood, however believe that the current situation is just a poor turn in for the rupee and reserve. Traders are looking to take this month in their stride and hope for a better return next year.
Written with input from Times Of India, Financial Express and Business Standard
Written by: Arjun Kulkarni