The rupee touched 72.00 mark against the US dollar for the first time in 2019 on August 26 and August 28. Following sell-off in domestic equities amid weakness in Chinese Yuan which fell to a fresh 11-year low.
Here is the outlook for the currency market and major factors which have influenced the same:
1. Surcharge on FPIs: The Budget proposal to hike surcharge on FPIs had spooked foreign investors, who withdrew more than $3.4 billion from domestic equities in July and August. The massive capital outflows also put pressure on the rupee, which slumped against the US dollar.
2. Withdrawal Of Surcharge: Withdrawal of enhanced surcharge on FPI is a big positive move for Indian markets as it could reverse the outflows seen post Budget. It will help the rupee to appreciate. Overall, a good sentiment booster for the Indian economy. However, its effects are yet to be seen on the market.
3. RBI Rate Cuts: In line with the withdrawal of surcharge, Reserve Bank of India's rate cuts bring hopes to borrowers. While a reduction in lending rates in the economy will clearly benefit loan takers, it will also hit those living off income from fixed deposits when the rates on these go down.
4. Repo Rate and Reserve Repo Rate Cuts: RBI had cut the repo rate and reserve repo rate by 35 basis points respectively. This is fourth time in a row this calendar year that the Central Bank has cut the key rates. This is expected to infuse liquidity in the market. However, it will at the same time cause devaluation of Rupee.
5. US-China Trade War: Whereas global market also affects Indian rupees, President Donald Trump said that US and Chinese trade negotiators would "very shortly" resume talks in what he described as a breakthrough in the two economic superpowers' trade war. Trump said that Chinese officials had made two " very good calls" and that "they want to make a deal".
6. The G7 Summit: Prime Minister Narendra Modi also had a crucial meeting with US President Donald Trump on the sidelines of the G-7 Summit in France.
Overall, the current situation for the currency hints that USD will become stronger against the INR. It is quite likely that USD/INR will touch the 75 mark by December 2019. However, if the equity markets gain strength, the USD/INR rate may recover. The possibilities for the same are very less, experts say.