Sinking rupee – The Hindu–29.06.2018

The rupee’s troubles just do not seem to end. On Thursday, the currency weakened past 69 intraday against the U.S. dollar, an all-time low. The rupee, which has lost almost 8% in value since January 1, is the worst-performing currency in Asia this year. It is, however, not the only currency to be in the doldrums. Emerging market currencies as a group have witnessed a sharp correction in their value against the dollar this year. The MSCI Emerging Markets currency index, for instance, is down about 6% since the beginning of April. The rise in international crude oil prices is one of the reasons behind the rupee’s decline as importers have had to shell out more dollars to fund their purchases. India’s current account deficit, which jumped to 1.9% of GDP in the fourth quarter of 2017-18 from just 0.6% a year earlier, is now expected to widen to 2.5% in FY 2019. This could spell even more trouble for the rupee as the demand for dollars could turn out to be overwhelming. The dollar index, which gauges the value of the dollar against a host of major global currencies, is up about 7.5% since February. The rise in global trade tensions amidst the ongoing trade war could be another factor behind the rout in emerging market currencies, but its impact on the rupee remains unclear as of now. But by far the most important reason behind the fall in the rupee and other emerging market currencies is the tightening of U.S. monetary policy.

Investors attracted by higher yields in the United States have been pulling their capital out of India at an increasing pace over the last few months. Foreign portfolio investors, in fact, took out ₹29,714 crore in May, almost a doubling of outflow compared to ₹15,561 crore in April. Most of the foreign fund outflow this year has come out of the bond market, which explains the steep fall in Indian bond prices. None of this turbulence in emerging markets, however, is surprising. The tightening of monetary policy by the U.S. Federal Reserve has traditionally caused the turning of the global credit cycle, which eventually leads to various crises around the world. It is hard to determine if the worst is over yet for emerging market currencies. But the fact that the American central bank expects to raise interest rates further this year suggests that more pain could be in store. The government, as well as the Reserve Bank of India, which recently raised domestic interest rates in response to rising external economic risks, may need to think out of the box to avoid a crisis similar to the taper tantrum of 2013.

via Sinking rupee – The Hindu

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