Saugata Bhattacharya
The rupee breached the 70 to a US dollar-mark on Tuesday before recovering later in the day. The downtrend in the currency brings to mind the taper tantrum days of 2013. However, most emerging markets (EMs) are now better buffered against global risks from the unwinding quantitative easing (QE) regimes, rising oil prices and trade wars.
First, let’s put the recent weakening in perspective. Over a longer horizon, say beginning 2014, the rupee has been remarkably steady and one of the best performing currencies. Most of the fluctuation has been over a range of 64 – 67 per US dollar. It was largely the result of the movement of the US dollar against other majors, and EM currencies and relatively less to do with domestic macroeconomics.
However, since early 2018, investors had begun to discriminate among EMs with rising crude prices widening the current account deficit in oil importing countries. Even then, since early 2018, the rupee’s 9.8 percent fall was still in line with the best EM currencies. One reason for this was the surge in the carry driven portfolio flows in mid-2017, which served to offset a perception of weakness in India’s external account. Unfortunately, with the US Fed rate hikes, this carry has progressively dissipated.
This week’s fall was part of a global emerging markets selloff triggered by concerns on the health of the Turkish economy. Forget the really vulnerable currencies such as the Turkish lira, Russian ruble, and South African rand. Among the stronger ones, the rupee fell 1.6 percent, compared to Chinese renminbi’s 0.8 percent, Brazilian real’s 1.2 percent, and the Malaysian ringgit’s 0.3 percent. Since mid-June too, when the rupee first crossed 68, it has depreciated more modestly than its EM peers.
What’s the prognosis going forward?
Determining the fair value of the rupee, as with all currencies, is notoriously difficult. The Reserve Bank of India (RBI) will indeed likely have intervened recently in the currency markets, matching the reported high levels of intervention in April –June 2018 quarter. Despite this, India’s forex reserves are still over $400 billion. The International Monetary Fund’s (IMF) metric of reserves adequacy rates India ahead of China given the underlying levels of total debt, money supply, etc.
India’s own past, as well as global experience, however, suggests forex intervention only manages to stabilise volatility in the short run. India’s macroeconomics, despite our Achilles heel of large fiscal deficits and debt, remain stable; growth is the highest among large economies. The potential of India’s under-penetrated consumer markets is rich. Global investors have also recognised India’s many structural strengths, especially stable inflation, built up through reforms. In this context, the RBI governor’s message to “ensure that we run a tight ship on the risks … for maximising macroeconomic stability” is the best bulwark for keeping the rupee stable in the face of potential currency wars.
(Saugata Bhattacharya is Chief Economist at Axis Bank. Views are personal. Tanay Dalal contributed to this article.)
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