Rupee comes under pressure again

Kathmandu, December 8

The Nepali currency is once again on shaky ground, as the Indian rupee, with which the country’s currency is pegged, has continued to come under pressure.

Nepali rupee will open for trading at 107.11 against the US dollar on Wednesday, lower than today’s 106.92, shows the reference rate of Nepal Rastra Bank, the central bank.

Although Wednesday’s exchange rate is slightly higher than those of Saturday and Sunday, when the Nepali rupee had plunged to a 27-month low of 107.23 per US dollar, signs of Nepali currency further losing ground have started to appear because of the weakness seen in the Indian currency.

Weakness in Indian currency will automatically cause the Nepali rupee to slide because Nepali rupee is pegged to Indian rupee at 1.6.

Indian rupee is currently under pressure because of signals that the US Federal Reserve will raise benchmark interest rate for the first time since June 2006 during the meeting scheduled for December 15 to 16.

The decision made by the European Central Bank on Thursday to slash deposit rate to minus 0.30 per cent from minus 0.20 per cent has also exerted pressure on the Indian rupee.

Further, there are fears that foreign institutional investors may pull out of India — triggering capital flight and putting additional pressure on the Indian rupee — because of delay in endorsement of the Goods and Services Tax (GST) Bill, LiveMint reported.

Because of these factors, the Indian currency fell to a two-year low of 66.90 against the US dollar in early trade on Friday. Since then, it has recovered some of the losses, and closed at 66.84 today.

But a latest Reuters poll predicts the Indian rupee to fall to 67 against the US dollar in the first six months of 2016 and hover around 67.70 by the end of November 2016. Morgan Stanley, on the other hand, projects the Indian currency to fall to 69.76 in the next 12 months.

Although these predictions are not encouraging, overall view on the Indian economy remains positive. Also, the Indian rupee’s performance against currencies of major developing countries is satisfactory, as it has lost only 5.4 per cent in 2015, as against the Brazilian real, which has lost 30 per cent, and the South African rand, which has lost 20 per cent in 2015.

A weak currency benefits recipients of remittance, as they will get more Nepali currency while exchanging money sent by overseas migrant workers.

A weak currency also provides leverage to exporters, as foreign buyers will get more of local currency to purchase goods or services here while exchanging dollars. But this theory does not always apply in Nepal where exporters have to deal with power cuts for prolonged hours and other structural problems.

Because of these reasons, Nepal has not been able to give a boost to its exports.

While there is no improvement on exports front, imports — except in the first three months of this fiscal year — have continued to rise because of the nation’s status as ‘net importing country’. This means a weak currency will only stoke inflation in a country like Nepal because importers have to pay more of domestic currency while purchasing foreign goods priced in US dollars.