Rupee Crashes below 64 to the Dollar, Heading for 66?

India’s rupee was Asia’s worst performer in April and losses deepened in May, typically the cruelest month for the currency.

The reasons for selling Indian assets are mounting, including rising crude oil costs, fading confidence in Prime Minister Narendra Modi and a spat between global investors and the government over backdated capital gains taxes. The currency lost 1.5 percent against the dollar last month, wiping out the first quarter’s 0.9 percent advance, and analysts cut estimates for the first time since January. It fell another 1.2 percent to 64.17 a dollar in May.

Australia & New Zealand Banking Group Ltd. in April lowered its end-2015 forecast and Credit Suisse Group AG estimated the currency will retreat to 66 per dollar in 12 months. HSBC Holdings Plc sees that level by the end of this year.

Seven Reasons

The median forecast is still for the rupee to end 2015 at 63.63, according to a Bloomberg survey of analysts, amid inflows from global fund managers and confidence in the central bank. The following are seven reasons why sentiment has started to deteriorate.

The May Jinx – Gold Imports

The rupee retreated in May during four of the last five years. The month typically has “the most number of auspicious days for Indian weddings, which sees a rise in gold demand and other associated spending,” according to ANZ.

Gold imports by the world’s biggest consumer surged 94 percent in March from a year ago to $4.98 billion. Policy makers raised import taxes on the metal three times in 2013 to help curb the current-account deficit and stem losses in the rupee, which sank to a record 68.845 in August of that year.

Inflation Risks – Crude Rally

India imports about 80 percent of its oil and the optimism around local assets in the past year had much to do with the plunge in Brent crude prices.

Now, the fuel’s 22 percent rally since March, coupled with the risk of deficient monsoonrains, is raising doubts over the outlook for inflation and monetary easing. The June-September monsoon is all the more crucial this year after unseasonal rain and hailravaged winter crops.

Widening Trade Gap

The trade deficit swelled to a four-month high of $11.8 billion in March as exports slumped 21 percent from a year earlier, the most since 2009. The current-account gap for the October-December period, the latest quarter for which data is available, held near its widest since June 2013.

RBI Intervention – Buying Dollars

The rupee’s real effective exchange rate versus currencies of 36 trading partners posted a 4 percent gain in the first quarter, according to Standard Chartered. That’s led to speculation that the RBI will counter any appreciation. The currency’s relative strength is pressuring margins for some exporters, Governor Raghuram Rajan said on April 7.

Net dollar purchases by the central bank in the spot market totaled $27.7 billion in the first quarter. Bank of America Merrill Lynch in April predicted the authority would buy $62.5 billion over 12 months to keep the rupee competitive.

Fed Tightening

Investors are also weighing the impact of a potential increase in U.S. interest rates. The rupee’s tumble to a record low in 2013 came after the Federal Reserve’s signal to withdraw monetary stimulus saw an exodus of funds from emerging markets.

While India has boosted its foreign-exchange reserves to an unprecedented $351.9 billion, uncertainties surrounding the Fed’s rate path continue to weigh on the rupee.