Indian Rupee Under Pressure
Image Credit: denharsh via Flickr

Indian Rupee Under Pressure

0 Likes
0 comments

Recently, the term “record low” has become quite common in articles following the fate of India’s rupee. As Pacific Money noted last week, the steady fall of the beleaguered currency over recent trading sessions, has become increasingly worrying for New Delhi. A new record low on Tuesday was even more concerning, until the Reserve Bank of India (RBI) stepped in to boost the rupee.

Weakness in the Indian economy, a worrying “twin deficit” in the current account and government budget, worries about stalled reforms and jitters about the U.S. Fed’s “taper” all conspired to pressure the rupee down over previous months. July saw the Indian currency stabilize against the US dollar, but renewed jitters in August prompted unconvincing policy measures from New Delhi (including limits on how much capital domestic investors could move overseas) which failed to stem the flows. Come Tuesday of this week, the rupee looked in danger of falling into a downward-spiral, and the RBI stepped in, selling dollars (possibly in the forward market) and buying its own currency to give it support.

Where things go looking forward depends on a range of factors. The term “balance of payments crisis” is being bandied around, not necessarily because India is facing one now, but because the country was hit by one back in the early 1990s, and there are interesting parallels to be considered. In that episode, Indian reserves were nearly exhausted to pay for the country’s trade deficit, growth and confidence took a major hit, and India ended up at the doors of the International Monetary Fund (IMF) to negotiate a rescue. For now, rupee forward contracts still show that the market expects further declines.

This time, India has a much larger pile of reserves (as this chart published in the Financial Times shows) measuring more than US$270 billion, but the issue of the Fed’s “tapering” is a big, new, disrupting factor. Investors are worried that the Fed could start to outline its expected “exit” from Quantitative Easing (QE). The “easy” money from the low rates U.S. economy had been flowing out around the world searching for yield…now that process is in the process of reversing (with China’s complicating slowdown not helping).

 These worries have already put downward pressure on many emerging market currencies and equity markets this year, even before the “exit” has been announced. Indeed, Reuters columnist James Saft has already described the process as the start of a “global war for capital.” Such a war would presumably see different economies (particularly emerging ones) competing for capital through interest rates, economic and financial policies (“stability” may rule), and ultimately overall growth rates.

It seems the RBI has to face some major challenges in the two weeks before its star new governor can take his place at the helm. Judging from how things have been going, for current governor Subbarao, they will probably be a very long two weeks indeed. 

Comments
Newsletter
Sign up for our weekly newsletter
The Diplomat Brief