The rupee breached the psychological 70-mark against the US dollar, an all-time low Tuesday. Per IMF, India’s economy is an elephant that’s started to run, but it’s the currency that’s running down, when it should be walking. In 2018, the rupee lost a tenth of its value to emerge as the worst-performing Asian currency. But don’t panic yet, as rupee volatility is due to a rift in relations between Ankara and Washington, which butchered Turkey’s currency lira and its $900 billion economy.
What happens in Turkey should stay in Turkey, but the turmoil spooked emerging market bonds, stocks and currencies. As Economic Affairs Secretary Subhash Garg noted, India has enough reserves to cushion the shock and even 80-levels won’t be a concern if other currencies too depreciate. Also, in a momentum trade, fundamentals play little role. So all is well, for now.
Much like the equities Santa-rally in December, August is known for mild risks for markets as liquidity thins and even small moves spook stocks and currencies. Until last week, the pound and euro seemed like troublemakers, but then lira unleashed a mini-rout in dollar-dependent Argentina, Brazil and Russia, whose currencies are plunging. When currencies weaken, financing dollar debt, a lifeline for developing nations, becomes difficult, forcing central banks to hike rates, choking growth.
For India, there’s an uncanny connection to the 2014 elections as the rupee slumped 25 per cent in August 2013 to 68.83. The difference between now and then is strong fundamentals. Back then, when forex debt grew over threefold to $390 billion, reserves fell to $292 billion, while current account deficit breached 5 per cent of GDP for the first time since 1990s, causing the rupee plunge. Forex reserves at $400 billion are of decent size now, though concerns over rising foreign debt, crude prices and gold imports persist. Even if trouble from Turkey settles down, trade war tensions, and US sanctions against Russia and Iran are potential market shockers in the weeks ahead.