Market experts and economists point fingers towards the controversial billionaire and philanthropist, George Soros, for playing a part in exacerbating the Asian financial crisis in 1997. However, with Soros finding himself in the centre of yet another controversy for his remarks on Indian Prime Minister Narendra Modi’s connection with industrialist tycoon Gautam Adani, is the domestic market right to fear an attack on the Indian rupee? George Soros has had some experience with taking short bets on sovereign currencies, and winning, in the past.
George Soros’ Big Short of Thai baht and Malaysian ringgit
In August 1997, a month after Thai authorities unpegged the baht from the dollar, the Asian Financial Crisis began. Thai banks, financial institutions and businesses were encouraged to borrow dollars by the Thai government without any hedges, domestic lending was heavily fuelled. However, the dollar continued to gain strength while Thailand’s trade fell, leading to the country facing difficulties in repaying their dollar debt obligations. This made it clear that the baht-to-dollar peg was unsustainable, forcing authorities to lift it. The peg was removed on 2 July 1997, and by October, the baht had fallen 60%. This led to a wave of destabilisation of other currencies across Asia which also resulted in depreciation of up to 47%.
George Soros bought forward contracts that sought to exchange the baht at a certain price against the dollar. However, when the baht fell and wiped off over half its value, Soros bought a billion dollars worth of the devalued currency on the spot market, and sold it using his forward contracts, effectively doubling his money. He repeated the same modus operandi with the Malaysian ringgit.
Indian rupee: The limitation and the protection
However, unlike the baht and ringgit, which were forced to unpeg from the dollar, the Indian rupee is not a fully convertible currency. This means that the rupee can be exchanged until a certain limit; however, beyond that, approval is required for larger sums. It has long been argued that the full convertibility of the rupee would improve liquidity in financial markets, increase employment and business opportunities, and provide easy access to capital.
However, drawbacks include greater volatility, a heavier foreign debt burden, and an impact on trade balance and exports. India remains a developing economy with inherent weaknesses such as a current account deficit. This puts pressure on the Indian rupee due to lower exports compared to imports, and a fully convertible currency would only exacerbate the pressure.