The Indian rupee has become Asia’s worst-performing currency, as the rapid depreciation has resulted in foreign investors exiting the Indian stock market. The INR is already down by 2.2 percent against the USD just in this quarter, which has triggered foreign investors to pull out $4 billion from India’s capital market, reported Bloomberg. This is the highest among countries where data is available.
Issues like higher than reasonable valuations, a widening trade deficit, and the Reserve Bank of India’s divergence with the Federal Reserve over interest rates also gave an impetus for foreign investors to exit Indian equities.
“The monetary policy divergence and widening current account gap have set depreciation in the rupee in the near term,” B. Prasanna, Head of Global Markets, Sales, Trading and Research at ICICI Bank, told Bloomberg.
While a weaker rupee means that exports from India are much more attractive, the rise in the cost of imported goods can quickly contribute to imported inflation. For India, which is still a net importer of energy, this can quickly cause a spiralling rise in prices.
However, December 21, the rupee surged by 31 paise to close at 75.59 (provisional) against the US dollar, as positive domestic equities and a weak American currency in the overseas markets boosted investor sentiment.