Weakening Rupee

Why in new?

Rupee crashed to a lifetime low of 69 against US Dollar.

How is the rupee trend?

• Rupee was pushed to a life-time intraday low of 69.10 a dollar.
• The rupee is the worst-performing currency in Asia this year.
• It has lost almost 8% in value since January 2018.
• The rupee’s previous historic low was in November 2016 (it plunged to 68.86).
• It is, however, not the only currency to be in the weakening trend.
• Emerging market currencies as a group have witnessed a sharp correction in their value against the dollar this year.

What are the causes?

• The rise in international crude oil prices is one of the reasons.
• Importers have had to shell out more dollars to fund their purchases.
• The rise in global trade tensions amidst the ongoing trade war is another factor.
• But its impact on the rupee remains unclear as of now.
• But by far the most important reason is the tightening of U.S. monetary policy.
• Investors attracted by higher yields in the US have been pulling their capital out of India.

• Also, China has been depreciating its currency (yuan).
• This is to offset the effect of duties imposed by the US.
• The Indian unit also seems to be moving in tandem with the yuan so that exporters don’t lose out.

What will the implications be?

• CAD -India’s CAD jumped to 1.9% of GDP in the fourth quarter of 2017-18 from just 0.6% a year earlier.
• It is now expected to widen to 2.5% in FY 2019.
• This could impact the rupee as the demand for dollars could turn out to be overwhelming.
• But although current account deficit has widened, it remains modest relative to GDP.
• Also, it is largely financed by equity inflows, including foreign direct investment.
• External risks - Moody’s Investors Service has ruled out any risk with this development.
• India’s large and relatively stable domestic financing base restricts its external vulnerability.
• It will contribute to the economy’s resilience by protecting from abrupt changes in external financing conditions.
• Debt Affordability - Currency depreciation transmitting into materially weaker debt affordability is limited.
• This is because of India’s low dependence on foreign-currency borrowing to fund its debt burden.
• India’s significant build-up of foreign exchange reserves in recent years to all-time highs provides a support buffer.
• This will contribute to mitigating the external vulnerability risk.

How does the future look?

• The tightening of monetary policy by the U.S. Federal Reserve has traditionally caused impact on the global credit cycle.
• It is hard to determine if the worst is over yet for emerging market currencies.
• But the American central bank expects to raise interest rates further this year.
• It suggests that there could possibly be more ramifications in the economy.
• The government, as well as the RBI, recently raised domestic interest rates.
• This was in response to the rising external economic risks.
• There is a need for reassessing the policy of altering domestic rates in response to the US Fed rates.

Source: BusinessLine, The Hindu