The rupee is back in the news following a sharp depreciation in its value versus the dollar in the last one month after a prolonged period of relative stability. It has weakened by a little over 4% since mid-July and on Friday nudged the 72 mark to a dollar before retracing its steps. The fall has to be seen in the context of the overall weakness in currencies of emerging markets and Asia in August. The Turkish lira, Brazilian real, South Africa’s rand, the Mexican peso have all uniformly lost value versus the dollar with the Argentine peso losing the most, but this has more to do with the Argentine economy’s woes. The trigger was China’s devaluation of the yuan to below the 7 per dollar level for the first time in more than a decade; the last time that the yuan was seen below the 7 per dollar mark was during the global financial crisis in 2008. The yuan’s devaluation is itself a part of the complex trade war that Beijing is now waging with the United States whose President has labelled China a currency manipulator. Emerging market currencies have also been depressed more since the bond yield curve inverted in the U.S. last week when yields on 10-year bonds fell below the two-year note signalling the market’s fear of a recession in the U.S. economy. While there’s no data to support such fears as of now, the trade spat with China seems to be giving the jitters to the market.
The fall in the rupee is, of course, influenced to some extent by the overall economic slowdown and the sell-out in the equity markets in the last couple of months leading to capital withdrawal by foreign portfolio investors. The capital outflow particularly has hit the currency’s valuation. But the fall is no cause for alarm as yet because there is stability on the external account with the current account deficit at a comfortable 0.7% in the quarter ended March 2019. Of course, export growth is depressed but the forex reserves are at historically high levels of $430 billion. In fact, the fall will make India’s exporters competitive. Economists often complain that the rupee is over-valued in terms of the real effective exchange rate making exports uncompetitive. Interestingly, the Reserve Bank of India does not appear to have intervened in support of the rupee, signalling that it is not uncomfortable with the fall. The central bank can be relied upon to enter the market if things get too depressing for the currency. The Finance Minister’s announcements on Friday are sure to perk up the markets on Monday and the rupee may yet bounce back. But, eventually, in an environment where other major emerging market currencies are depreciating, the rupee cannot be an outlier.