The rupee has had a sharp depreciation in its value versus the dollar in the past one month after a prolonged period of relative stability.
It has weakened by a little over 4% since mid-July 2019 and nudged the 72 marks to a dollar before retracing its steps.
How this fall should be viewed?
The fall has to be seen in the context of the overall weakness in currencies of emerging markets and Asia in August 2019.
The Turkish liras, Brazilian real, South Africa’s rand, the Mexican peso have all uniformly lost value versus the dollar.
The Argentine peso lost the most, but this has more to do with the Argentine economy’s woes.
What was the trigger?
The trigger for the fall was China’s devaluation of the yuan to below the 7 per dollar level for the first time in more than a decade.
The last time that the yuan was seen below the 7 per dollar mark was during the global financial crisis in 2008.
The yuan’s devaluation is itself a part of the complex trade war that Beijing is now waging with the US whose President has labelled China a currency manipulator.
Emerging market currencies have also been depressed more since the bond yield curve inverted in the U.S. last week when yields on 10-year bonds fell below the two-year note signalling the market’s fear of a recession in the U.S. economy.
While there’s no data to support such fears as of now, the trade spat with China seems to be giving the jitters to the market.
The fall in the rupee is also influenced by the overall economic slowdown and the sell-out in the equity markets in the last two months leading to capital withdrawal by foreign portfolio investors.
The capital outflow particularly has hit the currency’s valuation.
Why this fall isn’t worrisome?
The fall is no cause for alarm as yet because there is stability on the external account with the current account deficit at a comfortable 0.7% in the quarter ended March 2019.
Export growth is depressed but the forex reserves are at a high level of $430 billion. In fact, the fall will make India’s exporters competitive.
Economists often complain that the rupee is over-valued in terms of the Real Effective Exchange Rate (REER) making exports uncompetitive.
But, the Reserve Bank of India does not appear to have intervened in support of the rupee, signalling that it is not uncomfortable with the fall.
The central bank can be relied upon to enter the market if things get too depressing for the currency.
