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Flat On Its Back

The rupee’s resilience has again been blown away by its oldest nemesis: rising crude and foreign outflows. The outlook for the next year is not pleasant either

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It’s ironical that a just a day before the country celebrated its 72nd Independence Day, the rupee crossed the 70 mark against the greenback. On June 28, the rupee breached the 69 per dollar mark for the first time ever, and hit a new low at 70.40 on August 16. When the rupee was first devalued in 1966 and pegged to the American currency, it equaled 7.50 rupees. While the INR’s “once-upon-a-time story” has often gone viral on social media, the fact is that the rupee has been depreciating at a CAGR of 4.46% since it was first devalued.

In the ensuing decades, the US dollar’s dominance in global trade and finance has been absolute. Though, according to the IMF, the dollar’s share of global forex reserves has fallen to 62.7% in 2017 from a peak of 72.7% in 2001, there is no denying that the dollar continues to be the king of currencies. Despite just 5% of India’s imports originating from the US, 86% imports are dollar denominated. Similarly, 85% of our exports are invoiced in the greenback despite shipping only 15% goods to the US.

However, the rupee’s recent woes – down 10.57% year-to-date from 63.84 to 70.59 (Aug 29) – traces its roots to a worsening macro and the protectionist stance of US president Donald Trump. While India has not been impacted by the trade wars that the US is unleashing on the EU and China, what is hurting us more is the threat of punitive sanctions against Iran, one of the biggest suppliers of crude oil, and the economic crisis in Turkey. Compounding the crisis is the strengthening economic outlook in the US that has prompted the Fed to hike interest rates seven times since the end of 2015 to 1.92% (see: On the road to recovery). Importantly, over the same period, it began unwinding its quantitative easing (QE) by selling treasury securities and mortgage-backed securities from $10 billion-a-month in Q32017, to $30 billion in Q2CY18 before hitting a high at $50 billion a month in Q3CY18. The greenshoots of recovery thus prompted investors to pull money out of emerging markets (EMs) and plough it back home.

China, in a bid to offset the impact of tariffs slapped on it by the US, has resorted


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