ARRESTING THE FALL
With the rupee on a slippery slope, the weak currency is causing more pain than gain. The Board of India Today Experts prescribes a slew of measures to prevent further devaluation of the rupee and keep the country’s growth momentum going
Q What do you attribute the fall of the rupee to?
l N.R. BHANUMURTHY: Rupee depreciation is largely an outcome of the developments in the global economy. With the US Fed raising interests aggressively and US dollars flying back to safe havens, there is an outflow of US dollars from India as well. Going by the Reserve Bank of India (RBI) data, there appears to be an outflow of about $60 billion since inflation started firming up in the United States. Add to this the widening of the current account deficit (CAD) following the rising world oil prices as well as some taxes on exports that also appear to have put pressure on the rupee to weaken. In other words, the fall of the rupee could be largely attributed to open-economy macroeconomic issues and less due to domestic macro fundamentals.
l ADITI NAYAR: Higher inflation and expectations of sharp monetary tightening by the US Fed have led to a global flight of assets back to the US. This has led the Dollar Index to strengthen over the last several weeks, as a result of which several currencies have weakened sharply. With India being a large commodity importer, fears of a sizeable CAD, large FPI outflows, high domestic inflation readings, and the likelihood of a relatively shallower rate hike cycle by the Monetary Policy Committee (MPC) have contributed to the INR depreciating against the US dollar.
l DHARMAKIRTI JOSHI: Two forces—India’s economic vulnerability at the moment, and the magnitude of the external shock—determine the rupee’s volatility. We are less vulnerable—externally—today compared to the taper tantrum period of 2013. Recall that in fiscal 2014, the rupee plunged 11 per cent at the mere hint of monetary policy tightening by the US Federal Reserve (Fed). The current external shock is not only much bigger, but it is also far more complex. For one, foreign funds are scramming on the back of the Fed’s aggressive rate hikes and the greenback’s safe haven currency status in uncertain times. Foreign portfolio investor outflows from India topped $30 billion in the first half of this calendar year, which is the most we have seen in such a timespan. Two, even as slowing global demand is bad news for
our exports, high commodity prices due to the Russia-Ukraine conflict, and healthy domestic demand are keeping our import bill high. The CAD is expected to widen to 3 per cent of the GDP this fiscal from 1.2 per cent in the previous. That would require higher capital inflows to fund it. But for reasons just explained, dollars are leaving, rather than arriving at the shores. It is this interplay of rising demand for dollars globally and its reducing supply at home that is roiling the rupee.
“We are less vulnerable— externally— today compared to the taper tantrum period of 2013”
— DHARMAKIRTI JOSHI
Chief Economist, CRISIL
l AJAY SAHAI: Most advanced economies are not doing well. With the perception that the Fed will increase interest rates, there is a flight of capital, and most currencies are depreciating. Besides the fact that our trade deficit is increasing, that will put more pressure on the rupee. ■