Bullishness prevailed in the currency pair as dollar breached the key psychological level of 47.

00 and went on to make a high of 47.47. However as the week progressed the pair did find some correlation with the equity markets and fell below the 47 levels mark. This rise of Dollar against the Rupee has come as a surprise as the present fundamentals suggest that dollar should weaken against the Rupee. The currency has become the most underperforming in the globe during past month.

Why is the Rupee Falling? The loss of correlation between Nifty and USDINR of this week though markets rose by 1.05% even as Rupee depreciated however in later part of the week the currency and equities did move in correlation. The flow of funds in equity and debt markets continued to be positive for most part of the week. Equity markets have been in positive while bond yield have been in sideways direction for the entire month.

The key reason for rise of dollar against the Rupee happens to widening trade deficit of India. Although Indias foreign trade data continues to post strong growth numbers for last seven months through May 10. Stronger growth in imports (particularly oil imports) as compared to exports, however, has resulted in a sharp widening of trade deficit. Oil import increased to US$8.8 billion in May 10, the highest level in last 20 months registering 66.7% growth over same period last year. This is despite a 10% (mom) decline in international crude oil prices in May 10. This has facilitated outflow of dollars from the economy thereby leading to weakening of Rupee.