Understanding the Falling Indian Rupee

Understanding the Falling Indian Rupee

Kamaraj IAS Academy | Understanding the Falling Indian Rupee
  • August 14, 2019, 9:00 pm

Rupee, Asia’s worst-performing currency

The Indian rupee has now become Asia’s worst-performing currency this month. INR fell 3.49 percent against the U.S. dollar so far in August, setting it up for its second-worst monthly loss in four years.

 

What causes Rupee fall ?

There are many factors for the rupee’s movement but the primary one is China’s yuan, an unresolved global trade war and fleeing foreign funds. However, the rupee was not an exception. All over the world, emerging market assets fell against the greenback dollar, spooked by the unrest in Hong Kong and a 35 per cent fall in the Argentinian peso, even as the dollar index held stable against major global currencies.The rupee’s fall, though, was the sharpest in the region, followed by the Indonesian rupiyah. 

 

  1. FPI flows not being as healthy as some time back. Foreign investors overall have pulled out Rs 14,818 crore—the highest in nearly 10 months. The exodus of foreign institutional investors from the country after Finance Minister imposed a higher surcharge on super-rich with an annual income of at least 2 crores per annum in her maiden budget. And the government didn’t issue a clarification about the recently held a meeting on FPI surcharge, the investors are not expecting a rollback of the budget proposal. The FIIs have been withdrawing from India owing to the imposition of the higher surcharge. 

 

  1. U.S.’ additional duties on China, a fall in bond prices and Argentinian peso crash and the largest foreign money outflows in nine months have pressured the rupee.

 

  1. Though as per IMD the monsoon deficit as predicted earlier has recovered. But floods in many regions of the country don’t support well for the markets. India’s fall in the global GDP ranking is also putting pressure on the rupee.

 

  1. Growing expectations of a fiscal stimulus could be another reason for the weakness. 

 

  1. Besides that, the fresh tensions with Pakistan after scrapping of article 370 of the Indian constitution is negative for Rupee. India escalated tensions with Pakistan by revoking seven decades of autonomy for the state of Kashmir. That added to turmoil in emerging markets stemming from the U.S.-China trade spat.

 

  1. The rupee was recently overvalued by 24 per cent, according to the RBI's real effective exchange rate (REER) index, which tracks the rupee’s inflation adjusted performance .

 

  1. Though the international factors are supporting the currency, it’s the domestic factors which are weighing on the rupee and may impel it to touch 72 a dollar by the month-end. 


What it means for India?

While the rupee has depreciated in seven of the past 10 years, most of the decline was in a calibrated manner. Record foreign-exchange reserves of $430 billion and the most politically stable government in three decades give policy makers power to control the drop.

Speaking on the long-term perspective, the rupee will settle at around 70 per dollar if U.S. and China reach an acceptable agreement by end of the year, and 72 if they don’t. We can expects the Reserve Bank of India’s Monetary Policy Committee to reduce rates between 15-40 basis points in the next bi-monthly policy.

Foreigners were enthusiastic about buying Indian bonds when the government eased limits applicable for debt purchases by offshore buyers, because many developed markets offer very low yields. India has been a natural fit for investors borrowing funds in a cheaper currency to invest in markets offering higher interest rates.

The current account deficit is contained at around 2.5 per cent of the gross domestic product; crude oil prices remain steady at below $60 a barrel; and political stability works in favour of India. The rupee even as a little weak help the country preserve its export competitiveness.

 

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