Last week, the Indian rupee fell below the psychological 68-mark against the US dollar. It appears the currency took a marked turn for the worse, but everybody calm down as it isn’t an isolated incident. Emerging economies like Indonesia, Argentina, Mexico and Turkey—reliant on foreign inflows and vulnerable to rising US interest rates—are all under strain as investors are dumping local bonds and stocks. What’s unsettling though is, the rupee emerged as the worst performer in Asia having lost nearly 6 per cent so far in 2018.
Anticipated Fed rate hikes, exodus of foreign capital, sharply rising US dollar yields, balance of payments (net inflow/outflow of capital) and hardening crude oil prices are collectively exerting pressure on the rupee. Particularly, oil price hikes affect import bill, stiffens inflation, and weighs heavily on CAD, which widened to $13.50 billion in the December quarter from $7.21 billion a quarter before. High CAD means the country has to sell more rupees to buy dollars and pay its bills, in turn reducing the currency value. Higher CAD also implies the country needs constant dollar inflows, but investors are taking a one-way ticket to bask in the luxuriant glow of Dow Jones.
Peering into its toolbox, the central bank did what was expected of it—controlling money supply, tweaking rules for foreign fund flows and selling dollars in the open market to stem losses. Consequently, forex reserves fell to $417 billion down from an all-time high of $426 billion as on 13 April. But more of the same isn’t an option as it tightens liquidity.
Currency value is linked to economic factors like trade, inflation, employment, interest rates, growth and geopolitical conditions, which are all dicey. Though the rupee isn’t in the danger zone yet compared to its fragile position in 2013, all roads lead to the RBI, which should consider raising policy rates to attract capital and prop up the rupee, even at the risk of increasing borrowing costs.