Even as the rupee tests the psychological 80-per-dollar mark, it has not just held up against other major global currencies but appreciated considerably against them this year, in a “testament to the resilience of the Indian economy”, a senior finance ministry official told FE.
Since January, the rupee has appreciated 4.97% against the euro, 6.25% against the British pound and 12.25% against the Japanese yen. This is in sharp contrast with its 6.9% fall against the dollar in the wake of a rate tightening by the US Federal Reserve and consequent capital flight, and the adverse impact of the Ukraine war on India’s current account.
In fact, the dollar index against six major currencies – Euro, British pound, Japanese yen, Swiss franc, Canadian dollar and the Swedish krona — has gained 13% this year.
Roughly 40% of India’s merchandise trade of over $1 trillion and 22% of its software exports of $134 billion is denominated in currencies other than the dollar, trade sources said. The rupee’s rise against key currencies other than the dollar, therefore, softens the blow to India, a net importer, proportionately, they added. This will prevent any irrational spiral in the current account deficit, although it may still double to about 3% of GDP in FY23 from a year before, they said.
“It’s not gloom and doom for the rupee. Its movement has to be seen in proper context. Even three major global currencies have depreciated against the dollar at a faster pace than the rupee. This suggests our macro fundamentals remain strong — something that investors will bear in mind once the current fog of crisis clears up,” said the finance ministry official.
Pronab Sen, noted economist and former chairman of the National Statistical Commission, said the government and the central bank must refrain from aggressive interventions to defend the rupee at the moment. Any such defence tends to build in expectations among foreign portfolio investors that the Indian currency will depreciate in future once the interventions are minimised and that could be counter-productive, he added.
Top finance ministry and central government officials have repeatedly asserted that while they were not looking at reining in the rupee at a particular level, they will intervene in the forex market to curb volatility and ensure a smoother movement of the rupee.
The latest rupee depreciation, Sen said, is substantially driven by two factors–a rising current account deficit and the moving out of the foreign portfolio investments.
“In the case of the advanced economies (whose currencies have depreciated further), the role of portfolio investments is probably larger because they have totally open capital accounts. So, I suspect (very large amount of portfolio investments may have moved out of these countries). Moreover, given the recession fears in Europe, some amount of their domestic investment may have found its way into the US stocks market. So, it looks like a predominantly finance-driven currency depreciation in these economies,” Sen said.
Ajay Sahai, director general of the apex exporters’ body FIEO, said, analysis of the impact of the rupee movement on the Indian economy has to factor in the fact that a sizeable chunk of merchandise trade is not denominated in the dollar.