Weakening Rupee

Indian Rupee hit its historic low on Tuesday August 14, 2018 crossing the psychological mark of 70 before bouncing back to end slightly higher at ₹69.89 to one US$. Analysts term the fall as more of technical in nature as a result of happenings across the Globe. It’s mainly because of a one-sided fall in Turkish Lira which is down more than 40% against the US$ this year. Turkish Lira saw its steepest fall in just two days by declining16% on Friday August 10 and another 6.7% on Tuesday August 13, 2018 which has triggered weakness in the emerging markets as South African Rand, for instance, on Monday August 13, 2018 had its biggest single-day fall in a decade. Although Indian Rupee which was valued at ₹63.84 to the US$ at the end of 2017 had already been grappling with volatility in the crude oil, yet the Rupee has been relatively stable, before the Turkish lira began its seemingly bottomless journey last week, and got this latest shock. Chinese Yuan had also been declining for quite some time now due to the growing heft of US$.

Turkey’s currency crisis is triggered by many factors that include its standoff with the United States (US), which has made relations between the US and Turkey tense due to:

• US Department of the Treasury on Wednesday August 1, 2018 slapping sanctions on Turkey’s justice and interior ministers citing their roles in the detention of a U.S. pastor.
• Washington refusing to hand over an Islamic cleric charged by the Recep Tayyip Erdoğan government of masterminding the failed military coup in 2016.
• A potential bilateral deal to end Turkey’s continued detention of an American pastor and incarceration by U.S. of a Turkish banker collapsed, a few days back.
• The Trump administration plans to double punitive tariffs on steel and aluminium imports from the NATO member-country.

Indian Rupee has been fairly stable over 2016 and 2017, with inflation being higher than in developed countries, its purchasing power at home has been falling. Indian currency’s weakness should as such be seen as a natural phenomenon, if we compare its valuation with other currencies and Rupee’s latest slide from about ₹68.5 to ₹70 to one US$ also appears minor in comparison to other emerging markets. Indian Rupee is overvalued by about 15% in terms of the 36-currency REER (Real Effective Exchange Rate), and to catch up with differential inflation amongst 36 countries Rupee needs to depreciate more on nominal terms. India’s former Chief Economic Adviser and former Chief Economist at the World Bank, Kaushik Basu, recently said the Indian currency’s true value is closer to ₹70-71 to the dollar, and achieving that level will boost job-creating sectors like exports that have severely underperformed in recent years. Basu added, India seems stable enough to be able to weather the fallout of a currency war among other nations.

Indian rupee in 2013 was part of the ‘Fragile’ Five’ Economies that included Brazil, South Africa, Indonesia, Turkey, and India; as these countries ran the highest current account deficits, where imports are more than exports. Such countries find it difficult to attract 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 inflows to fund the current account deficit.

India’s foreign exchange reserves as on August 10, 2018 were at US$400.881 Billion, i.e. ₹27621.1 Billion as per RBI data released on August 17, the country is as such comfortably placed and there is in fact no need to panic on account of the Rupee.

Current Account Deficits are much 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. India is not in a crisis.

India is as such much better-placed than most other emerging economies to use this tumult of the weakening Rupee as an opportunity, instead of seeing it as a calamity.