The rupee fell through the 69 mark against the dollar on Thursday but recovered by the end of the session to close at 68.79, above its all-time low closing of 68.82 hit in August 2013. The fall was in sync with that for a host of emerging market currencies and the Chinese yuan, which now lost 4.6% since March 23 on concerns of a tariff war with the US.
While the Indian currency may have hit new lows, the depreciation in 2018 so far is comparable with the weakness in peer currencies — against a fall of 7.1% for the rupee, the Turkish lira has lost 17.4% while the Indonesian rupiah has given up 5.8%. Over a five-year period, the rupee has remained more or less flat whereas the Brazilian real has yielded 39%, the lira 55% and rouble close to 47%.
As Ananth Narayan, professor, SPJIMR, observed, from a real effective exchange rate perspective, the recent move is a healthy correction, and the rupee is more fairly valued now. However, while the fall in the Indian currency so far has been gradual, a stronger dollar, a sharper depreciation of the yuan — possible given the looming trade war with the US — and rising crude oil prices could combine to send the rupee into uncharted territory, say currency experts.
Moreover, capital outflows, especially from the bond markets, have exacerbated the fall — close to $6 billion has moved out since early April. Further outflows — possible given how the US is hiking interest rates — would drag down the currency further. While the Reserve Bank of India (RBI) may have been intervening to support the currency, the quantum of dollar selling is not known. Economists estimate the RBI has sold some $8-10 billion dollars since March.
Rather than using up foreign exchange reserves, Bank of America Merrill Lynch chief economist Indranil Sengupta has suggested India should raise money via NRI bonds like it did in 2013. Sengupta believes a $30-35-billion issuance would change investors’ perception of the Indian currency and steady it; he pointed out all the three NRI issuances had staved off contagion. In 2013, India attracted close to $29 billion as FCNR(B) bonds with the RBI offering banks a dollar swap facility. The redemption of the bonds three years later was barely felt by the currency markets.
Indian companies and banks need to repay around $27 billion of overseas borrowings by March, 2019. Typically, these borrowings are rolled over though this time round the cost of rolling over will be higher because the benchmark rates such as the US Treasury have risen and spreads have widened.
The rupee touched a record low of 69.10 against the dollar during Thursday’s trade. The Dollex was hovering around the 95.24 level compared with 94.15 in early June, while crude oil prices were hovering around 78.13 per barrel, up around $1.30 a barrel over Wednesday. The big concerns revolve around the deteriorating current account which could widen and reach close to 3% of GDP if capital outflows accelerate.