India has become the focal point of an emerging markets (EMs) rout after months of managing to stay on the periphery. The Indian rupee is now one of the worst performing emerging market currencies, declining 11% year to date against the dollar.
Bloomberg cited an unidentified finance ministry official as saying that India might consider selling deposits denominated in foreign currency to non-resident Indians to shore up the currency.
The immediate trigger for the market meltdown was data released recently, which showed India’s current account deficit had widened to 2.4% of gross domestic product (GDP) in the April-June period, on the back of rising crude oil prices, from 1.9% of GDP in the preceding three months. The current account deficit for the April-June period stands at $15.8 billion, the most in five years. To make matters worse, trade deficit widened in July, again due to oil imports, which stoked fears of a further deterioration in the current account deficit.
A fall in the home currency against the dollar has also come amid fears of a potential escalation in the China-US trade conflict after President Donald Trump said he was ready to impose tariffs on an additional $267 billion of Chinese goods, on top of a proposed $200 billion. Another factor was the stronger-than-expected August US jobs report, which boosted the dollar, keeping the Federal Reserve on track to lift interest rates this month and making another hike in December more likely.
With the sharp depreciation in the rupee and intervention by RBI in the forex market, the possibility of a rate hike has also increased.(Story Courtesy : LiveMint)