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Sensex Fall driven by the depreciation of Indian Rupee

Updated on February 26, 2016

Sensex Fall driven by the depreciation of Indian Rupee

On 17th Feb, 2016 the stock market witnessed a sudden plunge, which reminded us of the global financial turmoil of 2008. Besides India other Asian bourses too showed a bloodbath primarily because Iran failed to be part of a deal with major oil producers. Another critical reason was the depreciation of Indian Rupee to a record low. On Wednesday, 17th Feb the rupee touched 68.68 compared to US dollar, which was almost close to the 68.85 mark attained in August 2013.

Indian PSU banks have been struggling with their large share of NPAs, which led premier rating agency, S&P to predict a risk of future downgrades. Punjab National Bank and Bank of India recorded a fall of around 2-3 percent. A major selloff by FIIs and rise in foreign outflows also contributed to a sharp fall in Indian shares.

Main reasons why INR is falling against US dollar

  • China’s Uncertain Economic Conditions :The markets were under immense pressure due to devaluation of China’s Yuan and concerns regarding oil prices. Besides, IMF has mentioned about a slowdown in Chinese trade and weak commodity prices, which are in turn hampering growth of emerging market like Brazil.
  • Fall in Crude Oil Prices : The slump in crude oil prices, has helped in strengthening the US dollar, with US being the largest crude oil importer globally.
  • Selloff by FIIs : FIIs have sold shares amounting to INR7146 crore during Jan 1 to Jan 20 in domestic equity segment.
  • India’s Trade Deficit : A sharp contraction in exports for continuous 13 months amid worldwide demand slowdown in December 2015. Imports also reduced during the same period, thus widening the trade deficit.

We can only expect the situation to improve if the Indian currency offers some respite.

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