Rupee weakens as dollar demand rises after fraud

Rupee weakens as dollar demand rises after fraud

Context:

•  A marked increase in demand for dollars has been pushing the rupee lower in recent sessions as banks exercise increased caution over issuing buyer’s credit, letter of credit (LC) and similar instruments for trade finance in the wake of the fraud uncovered at Punjab National Bank (PNB).

Rupee depreciation:

• The rupee, which closed at 64.89 to a dollar on Tuesday, slid to as low as 65.31 intraday before state-run banks stepped in and sold some dollars helping the Indian currency pare its losses.
• The rupee closed at 65.17 to a dollar, down ₹0.28 when compared to the previous close.

Factors responsible:

• Since the PNB scam broke recently the rupee has depreciated 1.3% against the dollar.
• It has weakened about 2% this year making it the worst performing currency in Asia in 2018 after the Philippine peso, which has depreciated about 4.2%.

Curbing volatility

•  The Reserve Bank of India maintains that it never targets a particular value for the rupee and only intervenes to curb volatility.

Other factors that could impact the rupee:

• The recent trend of the dollar strengthening internationally.
• There has been an increase in dollar demand in the wake of the U.S. administration’s recent measures to incentivise the nation’s companies to repatriate earnings from overseas.