Posted On Tuesday, Aug 14, 2018
Quantum Fixed Income team shares their views on the depreciating Indian Rupee.
As the Indian currency witnesses a sharply depreciating trend, comparisons start getting made to the 2013 scenario.
The Indian Rupee then in 2013 was bracketed as being part of the ‘Fragile’ Five ‘ Economies. The fragile five coined then were, Brazil, South Africa, Indonesia, Turkey and India.
Fragile as these were Countries which ran the highest current account deficits (imports more than exports) which in a scenario of global risk off sentiment found it difficult to attract the capital inflows to fund the current account deficit.
These countries thus had to allow their currencies to depreciate rapidly and then increase interest rates to attract capital.
India did that in 2013, with the INR moving from around 54/$ in April 2013 to 68/$ in August 2013. In the meantime, in July 2013, the RBI raised interest rates by 200 bps to support the rupee and draw in capital inflows.
The Indian currency today breached the 70/USD mark for the first time (at the time of writing this article) and has now depreciated close to 10% in the year 2018 against the US Dollar.
Oil prices, India’s biggest macro risk, has played a big part in this depreciation. Foreign investor outflows, especially in the Indian bond market has also added to some pressure on the Indian Rupee.
Despite the 10% depreciation, the Indian currency is still relatively over-valued to some of its other EM.
But with this also being an election year and election years are known to bring its own idiosyncratic risks.
Add to that the risk of Global Oil prices, rising global interest rates and the risk of US economic and geo-political policies under President Trump suggests that Emerging market countries in general and INR will remain under pressure and volatile in the months to come.
But India is not in a crisis.
Current Account Deficits are lower than in 2013, Interest rates, both nominal and real, are sufficiently higher than they were in 2013. Inflation and fiscal deficit are under control. Forex Reserves are higher.
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