{"id":15097,"date":"2018-09-14T19:25:11","date_gmt":"2018-09-14T19:25:11","guid":{"rendered":"http:\/\/qatar-news.org\/qatarnewsEn\/?p=15097"},"modified":"2018-09-14T19:25:11","modified_gmt":"2018-09-14T19:25:11","slug":"indian-rupee-crisis-worst-is-not-yet-over","status":"publish","type":"post","link":"https:\/\/qatar-news.org\/qatarnewsEn\/?p=15097","title":{"rendered":"Indian rupee crisis: ‘Worst is not yet over’"},"content":{"rendered":"
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The Indian rupee, which has fallen by more than 12 percent this year against the US dollar, is currently the worst<\/a>\u00a0performing currency in Asia.<\/p>\n

A strong US dollar and high oil prices, coupled with investors dumping emerging markets’ currencies and a record high current account deficit – a measurement of a country’s trade where the value of its imports exceeds the value of its exports –\u00a0<\/span>are proving a toxic mix for the rupee.<\/p>\n

On Wednesday, it hit a record low\u00a0of 72.91 against the US dollar.<\/p>\n

The slide has pushed up prices of imported items such as petroleum products, commodities, electronics and engineering equipment –\u00a0<\/span>and\u00a0<\/span>analysts warn the\u00a0<\/span>“worst is not yet over”.<\/span><\/p>\n

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India\u2019s cash crunch persists as swap deadline passes<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n

“In the medium term, India should brace for more rupee weakness, due to a further pickup of inflation. We expect the rupee to reach a steady rate of somewhere around 75 [against the US dollar],” said Hugo Erken, chief economist at the Dutch multinational RaboBank.<\/p>\n

‘Global crisis’<\/h2>\n

A number of emerging economies – including Turkey and Argentina – have seen the value of their currencies drop<\/a> against the US dollar in recent months amid rising trade tensions between the United States and China that have rattled international investors.<\/p>\n

Mohan Guruswamy,\u00a0<\/span>former economic adviser to the Indian government, says the international instability has added to the rupee’s woes.<\/span><\/p>\n

“The crisis is ongoing. The rupee fall is partly a global crisis as well, all thanks to [US President Donald] Trump and his declaration of a trade war which is adding to the pressure and the uncertainty,”\u00a0<\/span>Guruswamy<\/span>\u00a0told Al Jazeera.<\/span><\/p>\n

India’s policymakers have long blamed offshore traders for aggravating falls in the rupee with speculative bets in currency-based contracts traded in financial centres such as Singapore.<\/p>\n

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Millions of Indians are lining up to exchange obsolete bank notes\u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n

“The short term sell-off that we have seen is worrying,” says Erken, citing a combination of factors contributing to it.<\/p>\n

“Global tensions over trade, stubbornly high oil price and, of course, country-specific turmoil in Turkey [central bank independency and inflation], Brazil [elections], South Africa [deteriorating institutional quality] and Argentina [low reserves, high inflation, high foreign currency debt],” he says.<\/p>\n

Impact of rupee slide<\/h2>\n

Higher oil prices pose significant risks for the economy of India,\u00a0which imports more than two-thirds of its fuel needs<\/p>\n

Burgeoning oil import bills could put further downward pressure on the rupee and\u00a0widen the country’s\u00a0trade deficit<\/a> – according to official figures, India’s imports last month stood at $45bn while exports were almost $28bn.<\/p>\n

“If you have persistent trade imbalances, persistent current account deficit, the rupee would keep on falling. There is a greater demand for dollars as the rupee weakens,” says Guruswamy.<\/p>\n

In such a situation, more people tend to sell rupees to buy dollars, or any other foreign currency that they require.<\/p>\n

The weaker currency is also sparking foreign sales of bonds and stocks, which in turn is further pressuring the rupee.<\/p>\n

“Money is flowing back to America amid a stronger dollar and incentives for people to keep their money in the US,” says Guruswamy.<\/p>\n

He adds that the steady slump in the Indian currency has a negative impact on Indian consumers “as petrol and diesel prices are going up” but provides exporters with a “short term” gain “by making them more competitive”.<\/p>\n

Checking the fall<\/h2>\n

The rupee’s defence in recent years has largely rested on a strategy from the central bank, the Reserve Bank of India (RBI), to drain cash from domestic money markets and raise short-term interest rates.<\/p>\n

On Tuesday, the central bank sold dollars in the market to stem the rupee’s weakness.<\/p>\n

But Guruswamy warns “t<\/span>here’s a limit to how much the central <\/strong>bank can defend” the rupee. “In the past few weeks, they have sold over $20bn. We cannot deplete our foreign reserves.”<\/p>\n

According to estimates, India’s foreign reserves currently stand at $400bn, down from a record high of $426bn in April.<\/span><\/p>\n

On Friday, the rupee strengthened by 50 paisa to 71.68 against the dollar in early trade in the forex market, on the back of a government assurance that all steps would be taken to ensure the domestic currency does not depreciate to “unreasonable levels”.<\/p>\n

However, analysts such as Erken, of RaboBank, warn against over-intervention.<\/p>\n

“It [the government] has to tread carefully. Large-scale currency interventions have the same effect as raising rates and the RBI certainly would not want to derail the current economic growth momentum,” Erken said.<\/p>\n

Silver lining<\/h2>\n

India’s ruling Bharatiya Janata Party\u00a0acknowledges that the currency’s fall is a matter of concern, but dismisses doomsayers’ predictions for the economy.<\/p>\n

It insists the economic fundamentals remain sound, with some saying the rupee’s depreciation will help make exports more competitive and reduce imports.<\/p>\n

“Rupee is not weakening, rather it is the dollar strengthening against all other currencies,”\u00a0ruling party spokesperson Zafar Islam told Al Jazeera.<\/span><\/p>\n

“In fact, India is in a much better position than other countries like Turkey and Argentina who have huge external debt and hence much more exposed to currency risk than us,” he adds.<\/p>\n

“The fall in the value of the rupee has also helped our exports. This month’s export figures are stronger than expectations.”\u00a0<\/p>\n

According to the ruling party, the rupee was still performing better than some other currencies and the country had sufficient foreign exchange reserves.<\/p>\n

Analysts such as Erken say India is experiencing a “goldilocks moment” which is reasonably low inflation and high growth, clocking an 8.2 percent gross domestic product (GDP) growth in the three months through June.<\/p>\n

What lies ahead?<\/h2>\n

“From a policy perspective, the government has been pushing hard to implement key reforms and shape a more business-friendly environment,” he says.<\/p>\n

But others argue policymakers cannot deflect blame for the lack of investment in the economy or policies that have allowed the current account deficit to reach unsustainable levels.<\/p>\n

There’s no quick fix to the crisis, warns Guruswamy<\/span>.<\/p>\n

“Trade imbalances have to be dealt with, current account gap has to be bridged. You have to shore up confidence among the investor community. There’s a serious trust deficit in the government. People who are investors, who deal with money, builders of the economy have no trust in the government,” he says.<\/p>\n

Global financial firm Nomura warns of further turbulence for the rupee as India gears up for a general election, due by May next year.<\/p>\n

“The key risks [to the rupee] stem from the government turning more populist ahead of the 2019 general elections [worsening domestic fundamentals] and a sharper-than-expected domestic growth slowdown [triggering equity outflows],” a company statement released on 10 September said.<\/p>\n

For his part, Erken says India should brace itself for the impact of further US punitive measures against China.<\/p>\n

“Another spoiler would be further protectionist announcements by the Trump administration. We expect another $200bn of Chinese imports to be levied before the [US] midterm elections,” he says.<\/p>\n

“This would fuel anxiety among investors, and we can expect another round of emerging market currency sell-offs.”<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

The Indian rupee, which has fallen by more than 12 percent this year against the US dollar, is currently the worst\u00a0performing currency in Asia. A strong US dollar and high oil prices, coupled with investors dumping emerging markets’ currencies and a record high current account deficit – a measurement of a country’s trade where the…<\/p>\n","protected":false},"author":10,"featured_media":15098,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[],"class_list":["post-15097","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-middle_east_news"],"_links":{"self":[{"href":"https:\/\/qatar-news.org\/qatarnewsEn\/index.php?rest_route=\/wp\/v2\/posts\/15097","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/qatar-news.org\/qatarnewsEn\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/qatar-news.org\/qatarnewsEn\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/qatar-news.org\/qatarnewsEn\/index.php?rest_route=\/wp\/v2\/users\/10"}],"replies":[{"embeddable":true,"href":"https:\/\/qatar-news.org\/qatarnewsEn\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=15097"}],"version-history":[{"count":0,"href":"https:\/\/qatar-news.org\/qatarnewsEn\/index.php?rest_route=\/wp\/v2\/posts\/15097\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/qatar-news.org\/qatarnewsEn\/index.php?rest_route=\/wp\/v2\/media\/15098"}],"wp:attachment":[{"href":"https:\/\/qatar-news.org\/qatarnewsEn\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=15097"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/qatar-news.org\/qatarnewsEn\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=15097"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/qatar-news.org\/qatarnewsEn\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=15097"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}