Depreciating rupee: To worry or not?
Economy

Depreciating rupee: To worry or not?

22 Jan 2016 | By Achin Garg

Rupee may touch 70/$ mark

If analysts are to be believed, the Indian rupee could soon touch the Rs.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 Rs.70-72/$ in fiscal 2016-17 mainly because of Yuan devaluation.

Rupee is already trading quite close to all time low of 68.85/$.

Timeline

Background : 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.

Performance-2015 : Rupee faring better than its counterparts

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.

Fact: Rupee depreciates to 28 month low

The rupee declined further, crossing the Rs.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 Rs.68/$.

2016-vs-2013 : Why the Rs. 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.

22 Jan 2016: Rs. still over-valued?

Rs. still over-valued?

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 Rs. (6% since since Aug'15) is in tandem with Chinese Yuan (5.6%).

22 Jan 2016: Rupee may touch 70/$ mark

Way Ahead: 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.

Next Timeline