Don’t panic about the rupee

The rupee has slipped to levels close to its all-time low of 68.825 against the dollar seen nearly five years back, in August 2013. While rising crude oil prices are a factor, much of the depreciation has occurred between end March and mid-May on the back of an appreciation in the dollar and the rise in US treasury yields which have gone past 3%. It is not just the rupee that has lost value; a host of other currencies—the Turkish lira, the Argentine peso, the Brazilian real and the Russian rouble have all tumbled sharply during this time against the greenback. Some of these currencies have depreciated more than the rupee and some much less; so, it would be fair to assume India may not have gained too much of an edge in the export market. In any case, as has been pointed out often enough, the value of the currency plays less of a role in the growth of exports than do infrastructure and costs such as wage costs.

Nonetheless, at a time when the currencies of competitor nations are depreciating, a weaker rupee should not be cause for too much concern. While the government may be loathe to let the currency drift down—a strong currency is believed to be a sign of a strong economy—the Reserve Bank of India (RBI) probably shouldn’t use up too much of its foreign exchange reserves to defend the rupee. Rather, whenever there is an opportunity, it could recoup reserves, which are now at $417.7 billion as of May 11, about $8 billion away from the highs of $426 billion.

It is true the sharp fall in the value of the Indian currency is prompting foreign portfolio investors (FPI) to dump bonds as they apprehend more depreciation and also a fall in asset values since interest rates look like they are going to rise. While the value of bonds—corporate and gilts—held by foreign investors is about a sixth of the investments in the equity markets at close to $460 billion, money market watchers say the continuous sales could push the rupee to well below 70 unless crude oil prices retreat sharply. Moreover, foreign flows into the equity markets could well taper off after allocations to China going up with the listing of the A shares in the MSCI Index.

Economists at Bank of America feel RBI may raise a fourth tranche of NRI bonds to mop up $30-35 billion since crude oil prices are now nudging $80 per barrel. The past three issuances, they point out, successfully staved off contagion. Again, it is not clear how much of the $27 billion of foreign loans and bonds, due to be repaid through March, 2019, will be rolled over. Even if India is no longer part of the Fragile Five as it was in August 2013, RBI can never be too cautious.