October 20, 2018

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India Rupee Plunges to The Dollar, Stokes Fears of Slowing Growth

India Rupee Plunges to The Dollar, Stokes Fears of Slowing Growth

 

 

India’s Rupee continued its plunge on Friday, giving weigh to the belief that the world’s fastest-growing economy may be slowing down.

 

The rupee crossed 74 rupees to the US dollar for the first time ever, after the country’s central bank surprised markets by holding off on raising interest rates. The currency recovered slightly later in the day.

The Reserve Bank of India (RBI) decided against hiking rates for the third time this year despite expectations that it would act to tame inflation caused by rising oil prices and the crashing currency, which makes imports more expensive.

The Indian rupee has fallen around 15% against the surging dollar this year, making it one of the world’s worst-performing currencies.

The Indian government has tried in vain to stop the slide. It recently made it easier for foreign investors to buy rupee bonds issued by Indian companies and raised tariffs on imported goods like washing machines and diamonds, measures designed to reduce the flow of money out of the country.

India’s stock market has suffered along with the rupee. The country’s benchmark index, the Sensex, has dropped more than 8% in the past month.

Though the Indian economy has grown 8.2% this year, strong economic growth in the USA has seen the Rupee perform among the worst of all currencies against the dollar, due to the strains of the rising oil prices and the strengthening of the US economy.

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‘A large number of international factors … have had a significant impact in markets across the world, and we’ve also been impacted because of that,’ India’s Finance Minister Arun Jaitley said Thursday while announcing a cut in taxes on fuel.

Analysts say more rate hikes — and more problems for the Indian economy — are likely.

‘India delivered punchy growth in the second quarter, but things may slow from here,’ economists at HSBC wrote in a note. ‘Rising oil prices are a particular headache … and rates may need to rise further.’

Although it held off on a hike this time around, the RBI adopted a stance of ‘calibrated tightening.’

‘This suggests that the hiking cycle is not over just yet,’ Shilan Shah, India economist at Capital Economics, said in a note Friday. ‘It would appear that the [central bank] felt it prudent to wait to assess the impact of the first two hikes before moving again.’

India could soon face sanctions from the USA because of its $5 Billion weapons deal with Russia.

Donald Trump imposed sanctions on China just last month for entering into a similar pact with Russia.

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