It's Summer of 69 on Rupee Street

It was all coming, in a storm.

Finally, when the dark clouds converged, the rupee fell to a historic low of Rs 69.10 on Thursday and there are strong signals that it would sink further and add to worries of the government, Reserve Bank of India (RBI) and the trading class.

A weakened rupee, which finally closed stronger at Rs 68.75, about 0.23% lower than the previous day's close after Reserve Bank of India's (RBI) intervention. The rupee, which is touching new lows, will have to wrestle against global headwinds led by a trade war launched by American president Donald Trump, a surge in oil prices, and a discomforting flight of capital inflows from emerging markets. Forecasted to breach the 70-levels against the dollar, analysts fear a bruised rupee will widen the current account deficit, and spoil the party for those who were celebrating a strong rebound in the Indian economy and GDP.

The United States trying to influence the global oil prices by asking countries like India and China to have zero imports from Iran by November 2018, creating trade barriers with China are all brewing a perfect recipe for a trade war that will strengthen the dollar and may further depreciate the rupee. Already, the rupee is the worst performing currency in Asia with a depreciation of close to 7% from January 2018 to date.

The rupee fell to Rs 69.10 in early trade on Thursday, finally closing at Rs 68.79 to the dollar after the RBI checked the volatility by asking banks to sell dollars in the market. With a forex reserve of $413.10 billion RBI has ample dollar liquidity to check the volatility, however only to a limited extend.

Pritam Kumar Patnaik, business head, Reliance Commodities, said, "The inherent strength of the dollar is emerging due to continuous flow of positive US economic data,impending rate hike by Federal Reserve and a weakening Euro. The US diktat on complete stoppage of all Iranian oil imports by November 2018 has led to surge in oil prices. The US expects India and China also implement this policy, putting further pressure on the rupee. A rising crude can have significant impact on the balance of trade. RBI's timely intervention alone cannot control currency devaluation and volatility although we will see them reacting to extreme weakness."

Rajnish Kumar, chairman, State Bank of India, while addressing shareholders during the bank's AGM, had said, "Rising trade disputes between major world economies remains a threat to market stability."

But it was all coming for the rupee. While most Asian currencies were depreciating last year, the rupee was dodging the fall with strong inflows from foreign investors. Rupee, experts said, was overvalued, failing to reflect its actual value calculated by underlying fundamentals in the economy.

Then in 2018 the global headwinds began to turn against the rupee, with the US economy reviving, job data improving and US treasury yields (10 year government bond) climbing. The Treasury yields rose to over 3% and are now hovering around 2.8%. The fickle foreign investors, who rushed in with greenbacks last year, are suddenly rushing out to stay invested in the US treasuries before the trade war becomes a calamity. To date, FPIs have withdrawn $7 billion from both debt and equity markets in India.

India's exports grew 20.18 % to $ 28.86 billion in May, the highest in six months. But the export numbers are falling from its peak levels and the trade deficit widened to a four-month high of $14.62 billion.

Ritesh Bhansali, assistant vice-president-forex risk consulting, Mecklai Financial, said, "Rupee breaching the 69 levels should not come as a surprise with crude having appreciated by 10% and the Chinese Yuan depreciating by 3.5% in the month of June itself. With rupee testing a new lifetime lows, the tide can change only if the US and China reach an agreement on trade disputes or the US softens its stance on Iran which will stabilise the supply side issues pertaining to crude oil.

Ananth Narayan, professor (finance) at SP Jain Institute of Management and Research, and a foreign currency expert, said there is nothing much to worry as the rupee has finally found its right value. "The move in the rupee and the bonds today was triggered by the rise in crude oil prices, the fears of a trade war with the US and the global risk-off sentiment. RBI has been intervening and protecting the rupee for the past few months. It still has ample reserves. But the recent move in rupee is a healthy correction and the rupee is more fairly valued now. We do need to address other issues around our trade and domestic industry. Our export growth has disappointed while imports of oil, gold and electronics have risen sharply."

Rising crude prices are a drag on the Indian economy and fuel inflation concerns, as it is a major driver of our current account deficit. "India imports around 80% of its crude oil requirements and higher crude oil prices risks widening India's current account deficit and adding inflation risks," Religare Broking said in a note.