Is rupee plunge a sign of India’s macroeconomic weakness?

The plunge of Indian rupee to historic low below Rs80 a dollar does not call for any urgent action from monetary authorities as the currency in fact has strengthened against all the other major currencies of the world, economists and analysts argue.

They also maintained that the fall of the rupee does not reflect an alarming deterioration in the overall macroeconomic situation despite serious challenges the sixth largest global economy poses, especially since India is already grappling with high inflation and weak growth.

The rupee has declined only against the greenback and its fall was lower than other major global currencies such as the Swiss Franc, the Euro, the British pound and the Japanese yen, analysts pointed out.

Finance Minister Nirmala Seetharaman has said the depreciation of rupee would likely enhance India’s export competitiveness, which in turn impacts the economy positively, while the depreciation also impacts imports by making them more costly. She noted that global factors such as the Russia-Ukraine conflict, soaring crude prices and tightening of global financial conditions are the major reasons for the weakening of the rupee against the dollar.

Since currencies such as the British pound, the Japanese yen and the euro have weakened more than the Indian rupee against the dollar, the rupee, in fact, has strengthened against those currencies in 2022, the minister said.

India’s chief economic Advisor Anantha Nageswaran said even though the rupee has depreciated by 7.0 per cent against the dollar, he would rather look at it as a dollar appreciation and not rupee depreciation. Because the rupee is not the only currency that has depreciated.

“The rupee has declined only against the US currency and has strengthened against all the other major currencies of the world,” he said, adding that with crude oil prices coming down and the onset of monsoon, inflation is expected to moderate.

Addressing the 186th Annual General Meeting of the Madras Chamber of Commerce and Industry, he cited the monetary tightening by the US as a major reason for the depreciation in rupee and other currencies against the dollar. “I think there is much to be grateful about and less to be concerned about the Indian economy.”

The Reserve Bank of India (RBI) Governor Shaktikanta Das said the country’s reserves are adequate enough and the central bank would intervene to contain the volatility to allay fears over further currency losses.

His remarks came as India’s foreign exchange reserves fell to their lowest in over 20 months as the RBI stepped up its intervention to protect the rupee from tumbling past 80 a dollar.

The reserves fell $7.5 billion to $572.7 billion as of July 15, data by the RBI showed. The reading is the lowest since November 6, 2020. In the first two weeks of July, the Indian central bank saw its reserves falling $15.5 billion, most of it defending the currency. India’s reserves had peaked to $642.45 billion on September 3, 2021.

Analysts pointed out that the increased outflow of foreign portfolio capital is a major reason for the depreciation of the Indian rupee. Monetary tightening in advanced economies, particularly in the US, tends to cause foreign investors to withdraw funds from emerging markets.

Economists warned that costlier imports and the widening of the current account deficit will continue to eat into India’s foreign currency exchange reserves. They argued that foreign currency reserves are depleting not only because of the widening current account deficit but largely due to a capital account imbalance: foreign institutional investors have been pulling their money out, mostly in the form of portfolio investment.

Foreign portfolio investors have withdrawn about $14 billion from Indian equity markets in 2022-23 so far.

— issacjohn@khaleejtimes.com