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Lira ushers in 70's era on Rupee Street

Experts see unit falling to 72 a dollar on widening trade deficit

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Though most of the emerging markets got over the Turkish blues on Tuesday, the rupee bucked the trend, falling below the psychological level of 70 to the dollar, forcing Reserve Bank of India (RBI) to swing into action.

But the rupee could see tough days ahead with India's trade deficit widening further.

The sharp surge in imports led to worsening of trade deficit to $18.02 billion in July, higher than the $11.45 billion in the year-ago period, according to the commerce ministry data released on August 14. A fall in imports to $43.79 billion in July was offset by a contraction in exports to $25.77 billion in July which will lead to lower foreign flows.

Forex experts say public sector banks were heavily seen selling dollars on behalf of RBI to prop up the rupee when it touched Rs 70.10 to the dollar, despite opening stronger at Rs 69.75. It closed at 69.89 on Tuesday.

Jamal Mecklai, currency expert and chief executive of Mecklai Financial, said, "RBI was in the market full on. The fall of the rupee is not the end of the world. I feel it needs to get weaker considering the fundamentals. It is not clear what are the factors that can strengthen the rupee now."

"In a ten year band from 2008 to date, the rupee has fallen from Rs 45 to the dollar to now Rs 70 to the dollar, a steep fall of 50% while the dollar during this period had appreciated by 17%. So the depreciating trend was on for a while with a pause during the Raghuram Rajan time when the rupee bounced back to Rs 59 to the dollar."

Though it is difficult to predict the level of the rupee, it is possible that it could get past Rs 70 to the dollar and settle between Rs 71 to Rs 72 to the dollar, according to forex experts.

Ananth Narayan, a currency expert, said, "The rupee could get to Rs 72 levels as imports far exceed exports. Even at the current levels it is overvalued."

Anindya Banerjee, deputy vice-president for currency and interest rates with Kotak Securities, said, "As the rupee shifts from being overvalued to a fair value there is bound to be a bit of instability. But I feel the oil overhang on the rupee is laid to rest with oil moving to $72 a barrel. It is reasonable to expect the rupee to range around Rs 71 levels."

Most emerging market currencies came out of the lira hangover as the Turkish currency rebounded close to 5% to the dollar, South Africa's rand rose 1.8% after sliding more than 9% on Monday, its biggest drop since the last financial crisis. The Russian rouble also edged higher after hitting its weakest levels since 2016 on Monday, and Mexican peso gained 0.8%.

"As long as oil continues to be at the current levels, we expect rupee to trade between 69.50 and 70.25 levels," said Salil Datar, executive director & CEO, Essel Finance VKC Forex.

Turkish president Tayyip Erdogan continued to take a belligerent stand saying that the Turkey could boycott all the electrical goods from the US and warned that those who are waging a economic warfare with Turkey would pay a price. However, investor fears were allayed after Turkey's finance minister, Berat Albayrak said he will hold a conference call with investors from the US and Europe.

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