What is weighing the rupee down

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Published: April 30, 2018 3:58:20 AM

In a report by the Axis Bank on the performance of the rupee, and its future trajectory, the currency has depreciated by about 5% (from 63.5 per dollar to 66.8) since January of this year.

The currency has depreciated by about 5% (from 63.5 per dollar to 66.8) since January of this year.The currency has depreciated by about 5% (from 63.5 per dollar to 66.8) since January of this year.

In a report by the Axis Bank on the performance of the rupee, and its future trajectory, the currency has depreciated by about 5% (from 63.5 per dollar to 66.8) since January of this year. The rapid devaluation of the currency vis-à-vis the dollar is due to rising oil prices and the rise in US Treasury yields on the back of expected tightening from the Federal Reserve (Fed).

The rupee’s performance has also been slightly below that of other emerging market currencies, but this is because there have been domestic factors priced into the recent decline. Such factors include the recent unearthing of numerous bank scandals, which began with the discovery of the Rs 12,000 crore PNB scam, corporate governance issues, and the worsening proportion of NPAs in the banking sector.

The fall in the value of the rupee is expected to impact the current account deficit (CAD), which the Axis Bank is projecting will hit 2.5% of GDP ($73 billion) by the end of this fiscal year, up from an estimated 2% from last year.

There are upside risks to this, however, with oil prices expected to remain high, and the rupee continuing to face downward pressures due to relatively lower yields on its government debt, vis-à-vis the Fed’s. This, though, can be offset by capital account surpluses (FY19 net capital inflows are expected to hit $87 billion), as FDI and banking capital are on the rise. But the continued rise of these flows depends upon the strength and execution of structural reforms passed by the Narendra Modi government, such as those relating to the on-going insolvency resolution cases, the allowance of FDI in certain sectors, and the continued adapting of enterprises to the GST.

FY13 was the previous instance wherein the Fed had tightened money supply (called the taper tantrum). In the wake of further upside risks to the rupee, RBI is well stocked up on foreign reserves, 13 percentage points above what the IMF recommends. Our macroeconomic indicators, on the whole, look healthier right now compared to what they were in FY13, with a BoP surplus, lower inflation, and a lower CAD. But in the wake of a depreciating currency, rising interest rates and a deteriorating fiscal deficit, the growth story of India could be in jeopardy due to high debt levels.

By Yash Budhwar
yash.budhwar@expressindia.com

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