Reasons for the depreciation
- The Chinese economy is facing a slowdown, which has caused its central bank to devalue Yuan to revive falling exports.
- This has triggered a panic among investors about the growth prospects in emerging markets, more so because World Bank has cut its growth forecast for global economy.
- Consequently, foreign investors are pulling out money from emerging markets including India causing the rupee to depreciate.
Rupee faring better than its counterparts
- The rupee was a better performer than other emerging market economies, owing to higher foreign exchange reserves and lower debt.
- The Indian forex reserves offered a cushion of 11 months of imports, better than Indonesia, Turkey, Thailand, Mexico, etc.
- RBI was successful in reducing volatility and kept the rupee in 65-67.5/$ band for most part of the financial year 2015-16.
Rupee depreciates to 28 month low
The rupee declined further, crossing the ₹68/$ mark on 20 January owing to growing demands of the dollar by importers. This is the first time since Sept 2013 that the rupee has crossed ₹68/$.
Why the ₹ depreciation is not as worrisome?
- The level of rupee, although close to Sept'13 level, is not worrisome because the crude oil prices are down to 1/3rd. Thus, lesser chances of surging imports affecting India's trade deficit.
- The 2013 depreciation was mainly due to issues in Indian economy like inflation, high trade deficit, etc. which is not the case now.
- Additionally, India has more foreign-exchange reserves now than in 2013.
₹ still over-valued?
22 Jan 2016
- Comparison of Indian rupee with its trading partners (measured by Real Effective Exchange Rate index) shows that it is still over-valued by about 12-13%, thus there is a scope for further depreciation.
- Infact, this is one major reason that Indian exports are becoming less competitive and hence falling.
- Moreover, the decline in ₹ (6% since since Aug'15) is in tandem with Chinese Yuan (5.6%).
Rupee may touch 70/$ mark
22 Jan 2016
- If analysts are to be believed, the Indian rupee could soon touch the ₹70 per $ mark.
- UBS, Barclays, Morgan Stanley, etc. expect the rupee to touch the 70/$ mark by as early as Mar'16.
- Kotak Mahindra Bank has predicted rupee weakening to ₹70-72/$ in fiscal 2016-17 mainly because of Yuan devaluation.
- Rupee is already trading quite close to all time low of 68.85/$.
Reforms urgently needed
- Experts feel that the Indian Rupee may depreciate by 3-4% in 2016.
- Although international markets significantly influence performance, a lot will depend on domestic policies.
- The pace of government reforms including passing of the GST (Goods and Service Tax) in the upcoming monsoon session will determine the inflows from foreign investors.
- This may increase the rupee demand and eventually balance out the rupee depreciation.