Sensex at the Bombay Stock Exchange fell over 500 points and the rupee lost up to 90 paise against the dollar to trade at a near 10-month low of 72.31 following concerns over the tariff war between the US and China, and a weak GDP growth in India of 5 per cent in the first quarter ended June 2019.
India’s real or inflation-adjusted gross domestic product (GDP) grew at 5 per cent in the June 2019 quarter of financial year 2019-20 (Q1FY20), the slowest growth in six years (25 quarters).
In nominal terms, the growth stood at 7.99 per cent, lowest since December 2002.
Reasons for rupee fall
The US announced fresh tariffs on China, due to which concerns grew over escalation of the tariff war between the two largest economies in the world. While China witnessed a decline in its currency by around 0.6 per cent, the Indian currency that opened on Tuesday after three days, witnessed a sharp decline of 90 paise or 1.2 per cent.
The markets also seemed disappointed with the growth in the Indian economy, with the GDP numbers for the first quarter having come in low at 5 per cent.
Since the US Federal Reserve, at the time of announcing its first rate cut in a decade on July 31, stated that it was jus a slight adjustment. The result of the rate cut allowed foreign investors to invest in American treasury bills.
FPIs have been exiting Indian markets over the last two months, and have sold Indian equities worth a net Rs 30,000 crore. However, in the same period, FPIs have invested a net of Rs 21,000 crore in the debt market.
Rs 5,500 crore from domestic equities since the rollback on August 23, 2019. The FPI outflow is also putting pressure on the rupee.
India has a currency swap agreement with Japan under which the latter will buy a certain amount in rupees, which could avert a further slide.
The Centre, in recent weeks, has announced the reversal of tax surcharge on FPIs, mega PSU bank mergers and a re-capitilisation plan. This can maintain investments in Indian financial markets.
The RBI recently announced the transfer of ?1.76-lakh crore of its reserves to the government which has allowed the government to provide boost to growth.