80 is Just a number ?

Rupee at 80 to 1 dollar, that’s one headline that’s making a lot of people go nuts on social media, there are TV debates happening and even people who have no interest in economics are suddenly debating on currency rates. It’s quite worrying for some, some even go to an extent and say that’s good news. So, does rupee going to 80 per dollar a good new or a bad news? (Well Definitely not good news, let’s clear that upfront), how is 80 different from 79.93? That’s a question one needs to understand and try to answer. 

It’s just a number imo, until now rupee was between 79 and 79.95 and RBI was intervening to prevent the slide of rupee and due to external headwinds, it touched 80. But , it created Headlines that rupee has touched 80, if we look at the bigger picture ( After looking the micro indicators, off course ) it’s a psychologically significant number ( may be for some ) but otherwise it’s only a number , there is no significance of the figure that it should create such a problem that SO MUCH concern must be shown. This situation that was there a month ago ,the same situation is now for Indian economy . 

What’s causing the slide?

It basically it is due to external headwinds, and less due to changes in the fundamentals of internal economy of India. The US feds have raised the interest rates, that has led to capital outflows from the emerging economies like India to move back to safe haven of Dollars(in US) . The other reason is , when you have such global headwinds like War , and recession there is a kind of risk averse attitude among investors which also leads to investments to safer assets , which leads to increase in demand of dollars and dollar denominated assets. 

What has triggered the downfall for rupee this month is the Monthly CPI data for June in the US. It was assumed the US inflation data might get moderated in next few months , however it was a number of above 9%, the day that number came out , investors started expecting that Feds will increase the interest rates by another 100 bps. In the previous meeting they had raised rates by 75 bps. The talk of 100bps hike led to US bonds yield rising and therefore in the increase in the demand of dollars, so it led to more of dollar related stress. 

So, it is the case of more Dollar strengthening rather than Rupee weaking. The next meeting of the US Fed is on 27th July, If US fed increases the rates by only 50-75 bps only then we might see that rupee appreciating. If we look at Indian Markets for last two days (21st to 22nd July) FPIs have become net buyers, the selling intensity for the moment in the initial days has come down. 

The rupee has also lost its value to dollar because the Dollar Index is also strengthening ( Dollar index is index of dollar w.r.t. to six most traded currencies , it tells us about relative strengthening of dollar to its other trading partners in Euro , Yen and other currencies) . If other currencies depreciate against dollar, then dollar index will increase. 

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Is it a BAD or GOOD news for INDIA?

I would rather start by stating how bad is it. If we see, since we are net importing nation, the price hikes of our imports have already started affecting out trade deficit (CAD). Now, if rupee depreciates, it will make our exports cheaper and imports costlier, so it will lead to increase in our imports leading to even worst CAD. On the other hand, our exports (Mainly IT and Pharma) will become cheaper and might make our CAD end up looking not so bad.

Also ,If we look at the early signs for the economy, the worst could be over too , for instance, the fuel prices are going down, because of the fear of recession , the other commodities like steel and food( vegetable oils) are also going south for past few days .

One of the most imported commodities like cooking oil , fuel , palm oil , sunflower oil , their prices have declined for the past three months . Government of India had reduced import duties on these commodities, so if the prices go down further their tax can be increased to support the fiscal deficit. This all is also reflecting in the markets also , they are turning green for past days.( HUL and other FMCG stocks are roaring ) 

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However, there are commodities like fertilisers, their price are rising, which means more subsidy from the government, more pressure on fiscal deficit. The rise in fiscal deficit will lead to more public debt, but due to rising inflation for the time being at least, the denominator(* nominal GDP) will also increase , so the debt / GDP ratio might not get impacted much. 

Recently, Government of India has also reduced the windfall tax for both domestic Crude and Fuel exports which will again put more pressure on the fiscal deficit but will give more relief to consumer. 

So, if we look a bigger picture apart from few areas a weak rupee is problem for both fiscal and current account deficit but there also some important sectors where the rupee will be shielded due to lowering of global prices. 

Is Rupee the only culprit?

If we look at the past few days, even though the Rupee has depreciated against dollar , it has appreciated against other major currencies like the Euro , Pound , yen etc. This actually tells us that relatively Rupee is not doing that bad in comparison to other currencies, if this wasn’t the case and if the domestic fundamentals were wrong in the country , the picture could have been much worse. Infact , rupee has relatively appreciated against the Euro and other currencies. 

Also, if we look at emerging economies too , there also countries like Indonesia which is net exporter , the depreciation is much lesser, but other than them other countries which are not next exporting nations, the depreciation is much more than Indian rupee. So, this tells us that deprecation in Indian rupee is due to global headwinds and dollar getting stronger due to rate hikes . 

Today 22nd July, ECB ( European central Bank) has also raise interest rates by 50bps, so now Euro will get stronger and dollar will get weaker as it was the case with EURO and Dollar normally. 

Another Myth: India’s External Debt Default

These days if we look at twitter or any social media platform , there is a Red flag being raised that India has to service 43% of its external debt in this calendar year . This will again be leading to rupee depreciation and also, we could default on our external debt. But , it’s mostly commercial borrowing and not sovereign borrowing , Since the last few years the interest rates globally were low so that attracted a lot of commercial borrowing . Most of this commercial borrowing will be rolled over and for the rest, the companies in India will sell rupee . In past few months RBI has been intervening in the currency markets by aggressively selling in the spot and forward exchanges , but there is a limit upto which RBI can manage the rupee slide. But, the theory that INDIAN government will default on sovereign debt and that will impact future fiscal deficit and rupee slide is wrong. 

To summarise, yes the rupee has crossed the 80 mark, but its not different than 79.35 mark and neither it tells us that it will touch 100 in the near future. There are few global indicators which are improving for us , some near and short term liabilities ( economic indicators) might not be in our favour , but it’s not a doomsday kind of situation for us . Managing currency rates , has become like a Game of Chess for the Central Banks all over the world, we are not getting check mate at least not in the near future. 

Blog By: Ankur Kushwaha, Sr. Consultant, Invest Punjab

*This blog doesn’t represent or reflect the opinion of Invest Punjab.

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