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The slide of rupee and fall of sensex

Date: 04 September 2019 Tags: Economic Reforms

Issue

 

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.

 

Background

 

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.

Future consequence

  • 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.