The slide in the rupee and also that of the currencies of emerging markets was triggered by the US slapping import duties on Turkey's steel exports. As a result, foreign investors rushed to exit from the country and also from many other Latin American and African countries with weak balance sheets comprising trade imbalance and surging inflation. Rising crude oil prices and expanding trade deficit have been prominent factors at play in pulling down the Indian currency below the 70 level.

Ironically, the rupee's tumble comes amid a buoyant equity market on improving economic climate and corporate earnings. The benchmarks have been hitting record highs at the same time as the rupee has been languishing at record lows, pointing to the confidence of domestic investors in local equities. The NSE Nifty 50 hit an all-time high above 11,700 end August 2018 and was placed around 11,500 in the second week of September 2018, recording a handsome gain of more than 10% in the calendar year (CY) to date.

Net sales of Nifty 50 companies spurted 22% in the June 2018 quarter over a year ago and were up 15% in the trailing 12 months ended June 2018 over a year ago. The trends indicate that the economy has come out of the twin shocks of demonetization and goods and services tax fairly well. The Nifty 50 earnings per share have also gone up to about Rs 410 in September 2018 compared with around Rs 380 in September 2017.

India's current account deficit, that is the differential between country's imports and exports, soared to a five-year high of US$18.02 billion in July 2018, primarily because of the country' dependence on imports to meet nearly 80% of its crude requirement. With the recent correction in gold, silver and copper, there is a possibility that the deficit might not deteriorate further. In fact, Brent crude oil prices have also come off the level of US$ 80 a barrel, their highest in four years and have been witnessing steady selling pressure.

Exit of foreign institutional investors (FIIs), too, has kept the rupee under pressure. They have net sold equity up to Rs 38373 crore in first eight months of CY2018. In contrast, domestic institutional investors net bought a total of Rs 69438 crore of equities in the period on the back on Rs 10585 crore of inflows into equity mutual funds in July 2018. Over Rs 43300 crore was poured into equities by mutual funds in the first four months of the current financial year, according to the Association of Mutual Funds in India. As a result, the asset base of equity mutual funds was up more than 10% to Rs 8.3 lakh crore in the current fiscal till end July.

Foreign exchange reserves are seen comfortable to support the rupee. Union Minister Arun Jaitley has assured the stash is enough to deal with any undue volatility in the currency market. That the Reserve Bank of India (RBI) is using the reserves to fend off the attack on the Indian currency is seen from the decline in the reserves to US$399.3 billion in first week of September 2018 from a lifetime high of US$426 billion in April, though the current level is almost equivalent to that a year ago.

The reserves have increased steadily over the last three years and are comfortable. In the currency crisis of CY 2013, when foreign exchange reserves fell to about US$275 billion, the import cover slipped to around seven months. Latest trend reveal that the import cover stands at a relatively safe level of just under 10.

The RBI increased its policy rates by 25 basis points to 6.5% early August for the second time in two months after a more than four-year pause. Though domestic economic activity has continued to sustain momentum, domestic inflation needed careful monitoring, according to the central bank. Thus, a scenario of rising interest rates will attract dollar inflow, supporting the Indian rupee in the near term.

The International Monetary Fund (IMF) recently noted that India's GDP is expected to increase to US$4.7 lakh crore by CY 2023. If the economy grows at the same implied nominal rate as between CY 2017 and CY 2020, the GDP is likely to reach the level of US$5 lakh crore by CY 2025, according to Union Minister of State for Finance Pon Radhakrishnan. The acceleration in economic growth will make India an attractive destination for foreign investors.

Outlook

The massive slide in the rupee is seemingly not hurting investor confidence much as evident in the record run of local stocks. The primary reason for the Indian currency's weakness is the surge of the US dollar. Will the US currency continue to move up in near term? The answer to this question should determine the fate of the Indian currency as well as other major global currencies.

The US dollar has been enjoying a spectacular spell against major global currencies including those of emerging markets and advanced peers. The dollar jumped in July this year after the IMF voiced worries about an uneven undertone in global economic growth. The fund noted that global growth is projected to reach 3.9% in CY 2018 and CY 2019, in line with the forecast of the April 2018 World Economic Outlook. But the expansion is becoming less even and risks to the outlook are mounting. The rate of growth appears to have peaked in some major economies and has become less synchronized.

Growth projections have been revised down for the euro area. Japan and the United Kingdom, reflecting negative surprises to activity in early CY 2018. The outlook of emerging market and developing economies is also becoming uneven amid rising oil prices, higher yields in the US, escalating trade tensions and pressure on the currencies of some weak economies. Economic growth projections have been revised down for Argentina, Brazil and India, the IMF noted.

The dollar index is showing signs of fatigue after its recent high above 97. Most of the positive factors supporting the currency such as economic strength, labour market trends and demand due to global trade frictions seem to have been already factored into the greenback.

Department of Economic Affairs Secretary Subhash Garg says the mismatch between demand and supply of rupee is small. At present, the Indian currency is fairly stable level and there may not be much variation, he added. The RBI also stated in its latest annual report that the growth impulses of Indian industry are strengthening, propelled by a sustained pick-up in manufacturing and mining activity. The services sector activity is also set to gather pace. Over the rest of the fiscal year ending March 2019 (FY 2019), the acceleration of growth that commenced in H2 of FY 2018 is expected to be consolidated and built upon. The real GDP growth for FY 2019 is expected to increase to 7.4% from 6.7% in the previous year, with risks evenly balanced.

To keep a check on the rupee, the Union government has proposed a slew of measures targeted at curbing non-essential imports and boost exports. Lifting of exposure limit of 20% of foreign portfolio investors to bonds of a single corporate group and 50% of any issue of corporate bonds and easing of restrictions on Indian banks underwriting masala bonds in rupees issued by Indian companies to foreign investors are on cards. A key measure is to allow manufacturing firms to avail loans up to US$ 50 million with a maturity of one year.

While the Indian rupee has crashed sharply, the quantum of loss is fairly limited compared with the meltdown seen in other emerging market currencies like the real of Brazil and ruble of Russia. Given the outperformance of domestic equities in recent months and signs of improvement in economic conditions, there is a possibility of FIIs returning back to local stocks.