Currency concerns: on the rupee

It has been a tumultuous time for the Indian rupee even as the Reserve Bank of India (RBI) has been actively stepping into the foreign exchange market to stem its free fall in pursuit of what it calls an ‘orderly’ exchange movement. The rupee had hit an all-time low of 85 to the U.S. dollar on December 19. Last Friday, it came precariously close to the 86-mark before a late intervention by the central bank pulled it back to 85.53. A confluence of factors at work have hurt the rupee in recent times, including the sustained outflows of foreign portfolio investments from securities markets after key indices peaked in late September. Overstretched stock valuations, a demotivating corporate performance in the July-September quarter, and China’s economic stimulus, nudged emerging market portfolios from Mumbai to Beijing. The Donald Trump factor added a fresh headwind with the dollar strengthening since his U.S. presidential electoral victory, and emerging market currencies were further rattled by his warning of a 100% tariff on BRICS nations for a common currency plan to challenge the dominance of the U.S. dollar in global trade.

Even before fears about Mr. Trump’s generally protectionist stance on trade matters materialise, India’s goods trade story is sputtering. Record trade deficits and import bills are going to show up in this quarter’s current account deficit, which is expected to double from around 1.2% of GDP in the second quarter. Services trade is still throwing up a surplus but the uncertainty around the H-1B visa regime will be a key monitorable, despite Mr. Trump’s latest soothing comments on the system. The previous RBI Governor, Shaktikanta Das, did well to forthrightly dismiss the BRICS currency as just an idea in the air, and stress that India has no de-dollarisation agenda. The government must also issue an unequivocal statement to this effect in public fora and in diplomatic parleys to put the issue to rest. It is true that the currencies of other emerging markets have taken a bigger hit and a falling rupee bodes well for exporters, but India also needs to worry about importing inflation, especially on inelastic items such as edible oil and crude petroleum. Moreover, foreign investment flows are uncertain as is the U.S. monetary policy outlook for 2025. There is also a limit to the extent the central bank can deploy forex reserves to manage the rupee’s trajectory, and the Finance Ministry has conceded that recent exchange rate movements cramp the freedom for monetary policymakers. India’s present economic woes are linked to domestic drivers such as faltering consumption and reluctant investments. With the rupee coming under pressure, the country’s external resilience could be tested as well in 2025, and policymakers must gear up to manage this new risk.