Indian Rupee vs US Dollar and other Emerging Market currencies…
On 18 September 2018, Indian Rupee depreciated to 72.98 against the US Dollar and there is a chance that it may further slide and fall as low as 75 against the US Dollar. Forex Experts and economists claim that there are plenty of reasons for the decline. Like the high demand for American Dollar, surging crude oil prices and capital outflows that have an impact on the Indian currency.
Does all this mean that Indian Rupee is a weak currency and its future is bleak? Or are we cherry-picking the data?
Indian Rupee has performed well against other major currencies which include currencies of other Emerging Market Economies. Hence, it’s the US Dollar that has gained against the majority of currencies. Rather than Indian Rupee having lost to US Dollar or weakened.
We will analyze in this article why it is not all bad news for Rupee. And how well it has performed against other currencies. And why Indian Rupee vs US Dollar is not the sole criteria to judge Indian Rupee’s performance
Performance of Indian Rupee and Pakistani Rupee against US Dollar since 1947
Before we compare the performance of Indian Rupee vs US Dollar and other major currencies, let us find out how well has Indian Rupee performed against our neighbour Pakistan whose currency Pakistan Rupee had outperformed Indian Rupee for a long time during this period. India and Pakistan started with the same currency value against the US Dollar in 1947. Although, both currencies were pegged to the British Pound in 1947. However, the Indian Rupee was pegged to the US Dollar at $1=7.5 INR in 1966. And it was only in 1971 when Indian Rupee outperformed the Pakistani Rupee and has not looked back since then. The table below compares the currency value of INR and PKR against USD since 1950.
|Country||Currency||/USD in 1950||/USD in 1957||/USD in 1967||/USD in 1977||/USD in 1987||/USD in 1997||/USD in 2007||/USD in 2018|
Source: Prof. Werner Antweiler, University of British Columbia. All rights reserved. Sources: IMF, World Bank, OECD, xe.com
The value of INR against USD depreciated from 4.76 in 1950 to 72.88 in September 2018. The INR has depreciated 1419 per cent against USD in the last 70 years. On the other hand, PKR has depreciated against USD from 4.76 to 128.99. So, PKR has depreciated by 2609 per cent.
Even if we consider the performance of INR and PKR against US Dollar in the last five years, the INR has performed much better.
On 13 September 2013, 1 INR was equal to 63.61/USD. And has since depreciated by 13.73 per cent to 72.35/USD.
USD-INR Chart (September 2013-September 2018)
While as on 13 September 2013, 1 PKR was equal to 104.75/USD. Since then it has depreciated by 17.9 per cent to 128/USD.
USD to PKR Chart (September 2013 to September 2018)
So Indian Rupee has performed much better compared to Pakistani Rupee. And it has similarly outperformed against other South Asian neighbours.
Indian Rupee vs US Dollar and Other Major Currencies in the last 5 years.
Indian Rupee has weakened against the US Dollar, so have almost all major currencies against US Dollars. But when we compare the data of last 5 years then Indian Rupee has appreciated against almost all major currencies. However, despite the appreciation against other currencies, a weak rupee against the dollar will have a significant impact on India’s economy since US Dollar is the main currency for international trade. The table below explains how INR has performed against other major currencies like the Australian Dollar, Canadian Dollar, British Pound and Euro among others.
Source: x-rates.com, Times of India
US Dollar vs Other Major currencies
There are many reasons for the rise and rise of American currency. It starts with the American economy that has now witnessed its highest growth in recent times. America for decades has been the largest importer for several countries especially developing countries. These countries including China and India have enjoyed low import duties for their goods exported to India as opposed to high taxes these countries levy on American goods resulting in a massive trade deficit.
America’s recent policy to push American goods across the world to reduce the trade deficit and to tax goods and services from these countries have impacted exports to America and hence reduced inflows and the reason recent for US-China trade wars.
Post subprime crisis, American central bank (US Fed) actively reduced interest rates to nearly zero. This cooled markets and helped avert a recession but that also led to a lot of funds flow into emerging markets as FII funds into their stock markets.
Now as the US Fed has begun to raise interest rates ending its expansive monetary policy after the American Economy started recovering from the 2008 financial crisis, there is increasing outflow of funds from India and other markets making US Dollar more pricey. This will means that there will be higher returns on the dollar deposits as compared to other currencies.
The below table shows how Dollar performed against all other major currencies in the last 5 years
Source: x-rates.com, Times of India
There are some fundamental reasons why USD has appreciated and may keep appreciating for some more time:
—The strength of the American Economy that has started growing at 4.2% against the predicted 4% in the second quarter of 2018. It is the highest growth since the third quarter of 2014.
—The US has tightened policies that allowed cheaper imports in the country. This means imported goods would attract more duties and the imports will fall and therefore lower outflows of USD for payment of imports.
—US under President Trump is seeking a fair balance of trade with partnering countries asking them to lower taxes on American products that will mean there will be more American products exported that will improve inflow of USD into American Economy
—America is the largest importing country for both manufactured goods as well as services. Trump’s America first policy aims to bring back manufacturing and many services back to America that aims to lower unemployment which is now very low and lower outflow of US Dollars
Source: United States GDP Growth Rate
Here are some of the factors that influence exchange rate fluctuations globally and the reason for Rupee’s depreciation:
International Exchange Rates-explained
International exchange rates of currencies are dependent on mostly the market forces of demand and supply. Nearly all countries follow a floating exchange rate to determine the value of their currencies against other currencies. That means a currency is worth the price a buyer is willing to buy it at. The value is largely decided by market forces and depends on a range of factors like economic stability, inflation, foreign trade and so on.
Why is US Dollar currency more in Demand?
The American dollar is the most stable global currency. It is also the most accepted currencies for international transactions. Because of the Dollar’s importance in the international trade due to its stability, most countries maintain foreign exchange reserves in the Dollar pushing up its exchange rate. According to IMF’s latest estimate, American Dollar constituted 62.5 per cent of global forex reserves followed by Euro, Yen and GBP.
The historical value of other Emerging Markets against US Dollar
|Country||Currency||/USD in 1947||/USD in 1957||/USD in 1967||/USD in 1977||/USD in 1987||/USD in 1997||/USD in 2007||/USD in 2018|
Source: Xe.com, X-rates.com, Yahoo Finance, https://www.measuringworth.com/datasets/exchangeglobal/
¹ The official Brazilian currency since 1994 is the Brazilian real. The values before 1994 are of Cruzeiro Ist to Third and Cruzado (https://en.wikipedia.org/wiki/Brazilian_currency)
² The Rand was introduced in the-then Union of South Africa on 14 February 1961. It replaced the South African pound as legal tender, at the rate of 2 Rand to 1 pound, or 10 shillings to the Rand.
³The Old Mexican Peso (MXP) is obsolete. It was replaced with the New Mexican Peso (MXN) on January 1, 1993.
Frequently asked questions regarding the currencies of Emerging Economies
What is the issue with the currencies of Emerging Economies?
—The currencies of emerging economies have witnessed a significant fall in its value compared to US Dollar in the recent times.
—This suggests that there is a global factor responsible for the depreciation of a host of emerging market currencies.
What is the status of emerging markets currency?
—The value of the Indian Rupee against the US Dollar has fallen by more than 12% since the beginning of 2018. And the currency now trades at its lowest.
—Other emerging economies have seen a fall in their currencies against the US Dollar. Indonesian Rupiah has fallen by 9 per cent. Argentina Peso b 50.3%. South African Rand by 18.7%. Russian Ruble by 18.2 per cent and Turkish Lira by 41.3 per cent.
What is the reason behind the fall of currencies?
—The U.S. Federal Reserve is expected to tighten its monetary policy stance by taking steps towards slowing down the growth in U.S. money supply.
—A slowdown in U.S. money supply growth affects the value of other currencies in two ways.
—Interest rates in the U.S. will begin to rise as the US Fed’s demand for various assets begins to drop.
—Fed begins to tighten the money supply. The availability of dollars in the global market is likely to turn scarce, compared to other currencies.
—Both of these factors affect the price at which traders, who try to speculate on future retail demand, are willing to buy the dollar using other currencies.
What are the implications for India?
—The fall in the value of the rupee means that buyers are now having to shell out more rupees to purchase dollars.
—The fall in the nominal value of a currency in itself does not suggest that its holders are worse off.
—If the real value of the dollars bought with the currency were to increase sufficiently, their effective purchasing power would still be intact.
—In the present case, however, the depreciation of the rupee is due to a fundamental change in investor attitude to the rupee for the worse.
—Depreciation of the rupee could affect the expected returns of people who invest across borders.
—A stronger dollar will cause a rush among investors to sell their assets in India and invest the money in the U.S., where they could earn higher returns.
What measures need to be taken?
—One major factor determining a currency’s exchange rate is its relative scarcity vis-à-vis other currencies.
—Central banks are the sole suppliers of national currencies. They can influence the value of their currencies by appropriately regulating their supply.
—Another factor that determines a currency’s exchange rate is the benchmark interest rate, which can be used as a tool to directly attract capital into the country and prop up the value of its currency.
—The Reserve Bank of India can affect both the money supply and domestic interest rates simultaneously through its monetary policy stance.
—Yet another common way to prop up a currency is through the direct intervention of the central bank in the forex market.
Emerging Market, Developed Market and Developing Market
Before we explain the performance of Indian Rupee against other emerging markets, let us find out what makes an economy Developed or Developing or Emerging.
According to the World Bank and the IMF, the fundamental difference is that emerging markets are growing rapidly. They are becoming more important in world economics. While developing nations are struggling and still need help from trade partners around the world.
A country that is a highly industrialized economy with a large service sector. A developed country will tend to have a high GDP per capita income. They have built out better infrastructure (transportation, communications) compared to a developing country. Another name for a developed market is “advanced” market or advanced economy.
Examples: United States, Japan, Germany, Australia, Canada, France
The complete opposite of a developed market. This kind of economy tends to have low GDP per capita income, the infrastructure is coming up or is non-existent.
Examples: Argentina, Nigeria, Jordan, Vietnam, Hungary, North Korea
Emerging countries are those with high levels of economic development, usually with rapid industrialization. Some countries, which were formerly developing nations without much opportunity for industrialization, have become emerging nations with unprecedented growth in energy, information technology and telecommunications. They differ from developing countries in that they no longer rely primarily on agriculture. They have made impressive gains in infrastructure and industrial growth. And are experiencing increasing incomes and quick economic growth. These economies are supposed to take over from the first world hegemony
Examples: Brazil, China, Turkey, Mexico, Indonesia, India
The measures can India take to control Rupee depreciation
While India’s fundamentals remain strong, its currency has depreciated mainly due to external factors. These factors will impact the Indian economy in short and medium terms but are unlikely to impact the economy in long term.
However urgent steps will have to be taken with respect to trade balance by many steps such as:
—Control and reduce non-essential imports
—Make the investment in India especially by NRI more attractive
—Issue long-term Dollar denominated bonds to increase Dollar supply in the market
—RBI may step in to persuade Banks to raise cheaper US Dollar denominated loans. And then lend those as rupee loan increasing US Dollar liquidity in the market
—RBI with a war chest of over US Dollar 400 billion may need to intervene regularly to ensure the stability of Indian Rupee
These are all step in right direction but unlikely to serve in long-term. However, India is no longer unaffected by the external environment that has caused Rupee’s depreciation. Hence, the country today requires structural reforms that can spruce up exports that have been sagging, a big leap in infrastructure to help boost exports rather than restrict imports and create a positive investment climate. It’s time India addressed concerns around Make in India to achieve goals of making India global manufacturing hub apart addressing concerns around trade deficit to attract foreign institutional investment.
Tourism – the great foreign exchange earner.
India has always earned more from travel and tourism than spent on foreign travel by Indians. But it’s time India starts paying attention to a clean environment and pollution control. India needs to boost infrastructure to attract tourism that is growing rapidly across the world and contributes significantly to the world economy. Although there are no alarm bells today, there are many middle-class Indians that have started going overseas on holidays due to better facilities and clean environment. If urgent steps are not taken and in time, we might soon see more dollars spent by Indians from their overseas trips than what India can earn from foreigners visiting India.