Rupee's Yo-yo Calls for New Playbook

By Shankkar Aiyar |Published: 10th July 2022 12:28 AM |

This week the Indian currency touched a new low — the value of a US dollar is Rs 79.25. And the forecasts place the price of a dollar at around Rs 82 before the end of the year. Characteristically, social media is replete with memes caricaturing the currency and its management. Dark humour apparently mitigates the pain felt across the political economy. 

Politicos and celebs are being trolled with social media posts from the past. One meme which has been viral on WhatsApp deploys a Bollywood song using symbols of the US dollar and the Indian rupee — $un raha hai na tu, ₹o raha hoon main!

The value of a currency has the potent power to trigger national pride or dismay. 1991, 1997, 2002, 2008, and 2013 are all milestones of local dismay and global doubts — crises triggered by a combination of endogenous and exogenous factors. Bimal Jalan, a former Governor of the Reserve Bank of India, who steered policy in the late nineties, once observed that every economic crisis in India is effectively a balance of payments crisis. Every five to seven years India finds the rupee yoyo-ing from one low to another. 

The term BoP, shorthand for the balance of payments, is a rather drab acronym for a condition which rouses emotions and even outrage. A nation’s BoP, shorn of the algebraic impact of macro fundamentals, is essentially the balance between foreign currency obligations and earnings. India which is a net importer balances the gap between its export earnings and import payments with inflows from foreign direct investment, foreign portfolio investment and the ever-reliable flow of remittances by Indians abroad.

The sum of pieces’ balance stands ruptured. There is an array of global factors. The end of the easy-money regime in the US triggered the flight to safety. In the first six months of the year, foreign portfolio investors have sold equity and debt worth over $30 billion or roughly Rs 2.9 lakh crore. Russia’s invasion of Ukraine upended the equilibrium of supply and demand in food and energy markets.

India imports around 82 per cent of its energy requirement — the price of crude has shot up from $75 per barrel to over $100 per barrel and that of coal has doubled from $240 per tonne on February 25 to $412 per tonne. Exports are growing but realisations are lower than the rising cost of imports — going by the gap of $25.6 billion in June analysts estimate the trade deficit could well shoot over three per cent of GDP. 

There is no disputing the global factors. What is perplexing is policy procrastination. This column had underlined the end of easy money in December when US Federal Reserve Chairman Jerome Powell had ‘retired’ the phraseology of ‘transitory inflation’. It would have been clear that interest rate hikes depleting the interest rate differential and quantitative tightening would follow laying the path for the erosion of the competitive edge. Yet the RBI did not find it necessary to raise rates till April.

On July 1 the government announced a windfall tax on oil producers and hiked levies on the import of gold. The steps are necessary but did the course correction have to wait so long. This week the RBI in an attempt to shore up confidence in the currency announced raising the investment cap for FPIs in debt markets and hiked the permissible limits on external borrowings for Indian corporates besides new norms to enable banks to raise deposits from NRIs. 

For sure the steps signal attention. However, the million-dollar question is would FPIs find it attractive to invest in Indian debt as the currency slides and as interest rates are hiked across the world. Would corporations raise external debt when the currency is expected to depreciate? Even as the market deliberates and debates the moot point is: Did the RBI have to wait till July to initiate the steps to shore up the rupee when the implication of global rate hikes was a known known. What possibly could have been the negative impact of moving earlier.

It is argued that 2022 is unlike 2013. For sure the 2013 crisis was compounded by political paralysis. That said the macro fundamentals — the debt level, the fiscal and current account deficits — do merit attention. It is true that forex reserves are higher at around $600 billion. Equally the magnitude could be better deployed, and leveraged to advantage. The fact that other currencies fared worse is no consolation given the spectre of perils.

As of Friday, it is clear that the next US Fed hike will be 75 basis points and the US Fed rate could well cross 3.5 per cent by 2023. As rates rise growth will stall. The narrative has shifted from stagnation to recession. This will impact capital flows into emerging markets and global trade. Yes, India is expected to grow the fastest but that is an estimation corralled by caveats. This calls for scenario modelling for an array of options.

What is troublesome is that the approach in 2022 seems just as reactive as in earlier years even though the economy has evolved in scale and complexity. Insufficiency of attention and inadequacy of strategy has economic and political consequences. An economy approaching the five trillion GDP mark and positioned to be the third-largest in a decade needs a modern playbook aligned to its aspirations. India can do better.

Shankkar Aiyar, political economy analyst, is author of ‘Accidental India’, ‘Aadhaar: A Biometric History of India’s 12-Digit Revolution’ and ‘The Gated Republic –India’s Public Policy Failures and Private Solutions’. You can email him at shankkar.aiyar@gmail.com and follow him on Twitter @ShankkarAiyar. His previous columns can be found here. This column was first published here.