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Opposition sharpens attack on Modi govt as rupee sinks to 70 per dollar

By the close of trading, the rupee clawed back some of its losses to end at 69.89 per dollar, up from its previous day’s close of 68.93

india Updated: Aug 14, 2018 22:56 IST
HT Correspondent
HT Correspondent
Hindustan Times, Mumbai
Rupee,RBI,Rupee fall
A man counts rupee notes inside a shop in Mumbai.(Reuters Photo)

The rupee plumbed new depths on Tuesday, dipping below 70 per dollar for the first time ever in a rout of emerging market currencies led by the Turkish lira, complicating the job of the Reserve Bank of India (RBI), potentially upsetting the government’s fiscal math and handing fresh ammunition to political opponents of Prime Minister Narendra Modi.

By the close of trading, the rupee clawed back some of its losses to end at 69.89 per dollar, up from its previous day’s close of 68.93 . In intra-day trading the currency hit a lifetime low of 70.08, following a 1.6% drop in the previous day’s trading. The rupee’s loss of 8.7% so far this year makes it the worst performing Asian currency. Dealers said some state-owned banks sold dollars to bolster the rupee, perhaps at the behest of RBI.

“The sharp drop in the domestic currency complicates the RBI’s job of keeping inflation in check as India imports oil and even if oil prices stay at the current level, it will cost more to buy it. Moreover, this is more worrisome for corporate entities that have foreign currency borrowings,” said Soumyajit Niyogi, associate director, India Ratings and Research.

While the macroeconomic context is different (largely because of India’s comfortable foreign exchange reserves now), the situation is broadly reminiscent of 2013, when India was governed by a Congress-led United Progressive Alliance government.

In 2013, India joined the ranks of the so-called Fragile Five emerging market economies (the others were Turkey, Indonesia, Brazil and South Africa) amid a free fall in their currencies. A string of policy measures put in place by then RBI governor Raghuram Rajan helped the rupee stabilise then. At the time, Narendra Modi, who was then chief minister of Gujarat, attributed the rupee’s loss to mismanagement by the central government and not just economic factors.

On Tuesday, Congress president Rahul Gandhi took a jibe at Modi. “Modiji finally managed to do something that we couldn’t do in 70 years,” he said on Twitter.

The National Democratic Alliance government was sanguine about the rupee’s fall, which precedes a round of crucial state elections leading up to general elections next years.

Economic affairs secretary Subhash Chander Garg said the “rupee is depreciating due to external factors” and there is “nothing at this stage to worry”. Garg said that he would not worry even if the rupee fell to 80 per dollar, provided other currencies weaken as well.

Still, a weaker currency makes RBI’s job of keeping inflation in check by making imports more expensive. RBI’s monetary policy committee led by Governor Urjit Patel has already raised its key interest rate twice by 0.25% each since June to the highest in two years to check prices and spent $23 billion to stanch volatility in the exchange rate.

The latest round of currency weakness came on the back of a plunge in the value of the Turkish lira, which has also hit the South African rand, Argentine peso and Russian rouble, but the rupee had already been under pressure amid the US-China trade war and rising oil prices. The possibility of further rupee weakness and rise in oil prices could put pressure on government finances.

“The weak rupee is indeed making life difficult for Patel and his fellow members of the monetary policy committee,” said Hugo Erken, a senior economist at Rabobank International in the Netherlands. “The RBI tightening cycle will put an end to the current free fall.”

Global risks, such as high oil prices and trade tensions, are weighing on the growth outlook, the International Monetary Fund (IMF) said in its recent report on India that likened the economy to an elephant that’s started to run. Despite the headwinds, the latest high-frequency indicators like the purchasing managers’ surveys show that India’s start to the July quarter has been strong.

The IMF has forecast India’s economy will grow by 7.3% in 2018-19 against an earlier estimate of 7.4%.

“The good old issues of large unhedged exposure, worsening current-account deficit, worries on fiscal deficit and uncertainty heading into elections” are playing out once again in the backdrop of general concern around emerging markets, said Gopikrishnan MS, head of foreign exchange, rates and credit for South Asia at Standard Chartered Plc in Mumbai. With fresh pressure on emerging markets, the rupee is expected to move in a range of 71-72 against the dollar, he said.

To be sure, there are some silver linings. For one thing, with foreign exchange reserves of over $400 billion, the world’s fifth highest, India possesses the means to guard against extreme volatility or a free fall.

Even so, a further knock on the rupee could spell economic trouble, economists said. “Given the kind of exchange rate depreciation, it will have an asymmetric and dampening impact on the current account deficit, imports and could lead to more borrowing. It’s alarming,” said NR Bhanumurthy an economist at the state-run National Institute of Public Finance and Policy.

(With agency inputs)

First Published: Aug 14, 2018 22:55 IST