The rupee is in a free fall, touching a new historic low every other day. Last Thursday, the rupee stood at 72 to the dollar and on Wednesday, it hit 72.97. It ended the week at 71.73 on September 7.
The depreciating rupee has set off alarm bells across sectors and analysts. Niti Aayog chief Rajiv Kumar likened the value of the rupee to the temperature in a thermometer that falls and rises.
“It’s wrong to say that fall in rupee value will lead to inflation. Value of rupee is just a price depending on supply and demand. I don’t believe in strong rupee…Rupee should remain in its natural value,” Kumar said. Earlier, he had said that the currency should be allowed to find its ‘natural level’. “Allow the rupee to depreciate to find its fair value,” he stressed.
Finance Minister Arun Jaitley stepped in saying there was no need for “panic and knee-jerk reactions”. “There are no domestic reasons…Reasons are global. In the last few months, the dollar has strengthened against every currency,” Jaitley pointed out.
So, what are the global reasons? Explaining further, Jaitley said, “There is one currency which has strengthened and the reasons are obvious, because of certain policies in the United States, there is flow of dollars into the US. We are net buyers of oil and, therefore, if by creating shortages, oil price is temporarily raised, that adversely impacts us, that’s an external factor. We are not in the trade war business, but when countries neighbouring us devalue their currencies, that has corresponding impact on us. Turkey had an impact on us.”
The US diktat to countries trading with Iran to cut their oil imports from November 4 too is impacting the rupee. India imports over 80% of its oil. Iran fits into India’s import preference due to its geography, terms of supply — it offers India the longest credit period.
Iran has supplied about 18.4 million tonnes of crude oil from April 2017 to January 2018. India is only behind the US and China in oil consumption. Increasing import bills will adversely impact the current account deficit (A measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the goods and services it exports).
The US’ actions have escalated trade tensions and increased uncertainty in the global economy. This has a negative impact in emerging markets. An example of this is Turkey, where its currency lira, has almost fallen by half. A reason for this sharp fall is US President Trump’s decision to double tariffs on Turkish steel and aluminum, when Turkey jailed a Protestant American pastor.
A possible US and China trade war is also making the emerging markets gloomy. The Chinese economy, the world’s second-biggest, is expected to slow down faster than initial estimates, and so the impact of the trade war with the US will be much worse, reports the AP.
US Interest Rates
The Federal Reserve’s push to steadily raise its interest rates is contributing to the turmoil. The US rates were near zero for almost a decade after the financial crisis, but as the economy improved, the Fed changed course and raised its main policy interest rate in June. This is expected to increase further.
Rising rates in the US mean that banks and bond investors will pull out money from riskier emerging markets.
The increasing US rates have perked up the dollar, by over 3% this year against quite a few currencies. This makes servicing debt denominated in dollars a more expensive proposition.
This is a big problem for countries like Argentina and Turkey and, which have taken a lot of loans in foreign currencies. According to an AP report, central banks in Turkey, Indonesia and India have increased their benchmark interest rates to improve confidence in their currencies by raising returns for global investors.
Last week, Argentina increased its main rate by 15 percentage points to 60% to halt a slide in the peso. In fact, Argentina has seen its currency slide by more than half this year.
Fortunately, India has $409 billion parked in foreign exchange reserves. This means that the RBI has the wherewithal to absorb currency shocks by selling dollars and curbing the amount of rupees in the market, which will give its value an impetus, says Adhil Shetty, CEO of BankBazaar.
Fall of Currencies Vs Dollar
• Venezuelan bolivar – almost 100%
• Argentine peso – 52.3%
• Turkish lira – 43%
• South African rand – 20%
• Brazilian real – 20%
• Russian ruble – 15%
• Iranian rial – 15%
• Indian rupee – 11%
• Chilean peso – 11%
• Indonesian rupiah – 10%
• Chinese yuan – 5%