Ira Singh
Khabar Khabaron Ki,06 April’24
India, like many emerging economies, faces the challenge of maintaining currency stability amidst global economic fluctuations. Despite boasting substantial foreign exchange reserves , the Indian rupee has been experiencing a downward trend in recent times, raising concerns among economists and policymakers . This article delves into the complexities underlying the depreciation of the rupee despite the country’s robust forex reserves.
According to RBI data, India’s forex reserves stood at $642.49 billion as of March 15, 2024. The rupee had settled at a record closing low of Rs 83.43 against the dollar on Wednesday(27 March’24).
Market participants speculated that the RBI did not intervene in the forex market towards the end of the trading hours, leading to a sharp depreciation in the local currency.
The rupee has seen an abrupt depreciation in the past two/three trading sessions due to Chinese yuan depreciation adding pressure on emerging economies’ currencies,” Harsimran Sahni, executive vice-president and head of treasury at Anand Rathi Global Finance, reportedly quoted as saying.
“Forex reserves are at an all-time high as the RBI has been adding forex in the past few months, leading some market participants to cut their short positions, thereby unwinding the dollar/rupee short trade. Foreign portfolio investors with unhedged rupee exposure have been selling government bonds after the rupee weakened, adding pressure on the rupee,” said Sahni.
Analyzing the Situation: Insights into Complex Market Dynamics
The dollar inflows into financial markets are often called ‘hot inflows’ because they get in and get out very quickly. When the dollar inflows come, the currency of the receiving country generally appreciates and gives a feeling of safety and security from any external shocks. However, when the outflow happens, the currency depreciates in quick succession, leaving the country in a vulnerable situation.
India has been a beneficiary of dollar inflows into its equity as well as debt market over the last 10 years. During the period, the country saw a net investment of billions of dollar with the exception of two years – 2016 and 2018. Clearly, India is relatively better placed than the earlier two crisis of East Asian currency turmoil of 1997 and taper tantrum in 2013 when its currency depreciated big time. The taper tantrum was the event in 2013 when the global central bankers decided to halt the bond buying under quantitative easing , which was used to create additional liquidity in the market to spur growth post 2008 financial crisis. A part of this additional money found its way into emerging markets including India, which helped in pushing the prices up in the financial market. The very fear of withdrawal of such money created a havoc in the financial markets across the world.
Market Response and Outlook
Financial experts are pointing to the recent weakness in the Chinese yuan as a significant driver behind the depreciation of the Indian Rupee (INR). The Chinese yuan has experienced a period of weakness against major currencies, driven by concerns over China’s economic slowdown, trade tensions, and policy adjustments by Chinese authorities. The yuan’s depreciation has reverberated across global markets, impacting currencies of emerging economies, including the Indian rupee.
Besides, the market reports indicate a tightening of dollar liquidity in the foreign exchange market, with banks and financial institutions facing challenges in accessing US dollars. Reportedly,the scarcity of dollars has intensified in recent days(over the past few weeks), raising concerns about the rupee’s ability to withstand external pressures.
But, the absence of timely intervention by the Reserve Bank of India in the forex market has emerged as the primary factor behind the recent depreciation of the Indian Rupee (INR),believe experts.
Factors Contributing to the Depreciation of the Rupee:
1.Global Economic Uncertanity :The ongoing economic uncertainty fueled by geopolitical tensions, trade conflicts, and the lingering impacts of the COVID-19 pandemic has exerted pressure on emerging market currencies, including the rupee. Investors seek refuge in safe-haven currencies such as the US dollar, leading to capital outflows from riskier assets.
2.Rising Crude Oil Prices:India, being a net importer of crude oil, is particularly vulnerable to fluctuations in oil prices. The recent surge in global crude oil prices has widened the country’s current account deficit, exacerbating concerns about the rupee’s depreciation. High oil prices strain India’s trade balance and increase its dependency on foreign exchange reserves to finance imports.
3.Inflationary Pressures: Persistent inflationary pressures, exacerbated by supply chain disruptions and rising commodity prices, have eroded the purchasing power of the rupee. The Reserve Bank of India’s (RBI) efforts to contain inflation through monetary policy measures, including interest rate hikes, have had limited impact on stabilizing the currency.
4.Weakening Economic Fundamentals: Structural weaknesses in the Indian economy, including sluggish growth, fiscal deficits, and a widening trade imbalance, have undermined investor confidence in the rupee. Concerns about the government’s ability to implement structural reforms and address long-standing issues such as infrastructure bottlenecks and regulatory hurdles have further dampened sentiment.
The rupee, having depreciated 0.6 per cent against the dollar in March so far, is likely to rebound in April, largely due to foreign inflows ahead of India’s government bond inclusion in JP Morgan’s Government Bond Index-Emerging Markets, set to begin at the end of June 2024,according to information.