06 Dec 2016 19:50 IST

Rupee’s fall – now and then

The rupee touching a new low last month is not as alarming as it was in 2013. Gurumurthy K tells you why in Insight

After more than three years, the Indian rupee revisited its previous lowest point and recorded a fresh low of 68.86 on November 24. But the fall to the new low was not as fast and volatile as in August 2013, when the rupee hit 68.85 against the dollar.

Here, we take a look at what has changed from the macro-economic point of view in the country since August 2013 and why this fall in the rupee to the new nadir this time was not as alarming as it was in 2013.

The US Fed trigger

The sharp fall in the rupee in 2013 was triggered by the US Federal Reserve’s announcement regarding tapering of its quantitative easing programme in May that year. The rupee, which was hovering around 54 against the dollar at that time, surged to 56 by the end of May. It was a free fall thereafter as the rupee tumbled to its new low of 68.85 by August 2013.

Fear of the dollar and US treasury yields strengthening made foreign money flee out of the emerging economies. India was one of the worst hit as the debt segment witnessed a strong outflow of foreign portfolio investor (FPIs) money. FPIs sold a whopping $13 billion of Indian debt between June and November 2013.

The macro-economic indicators were also not in the country’s favour. The current account deficit had widened to $31.8 billion by December 2012 but recovered to $18.1 billion in March 2013.  The trade deficit, a major component of the current account deficit, widened to $19 billion in May 2013 from about $11 billion in June 2012.

However, various measures taken by the government and the Reserve Bank of India under the governance of Raghuram Rajan, who took office in September 2013, helped the rupee recover from this low to sub-60 levels by May 2014.

Macros on strong footing

The rupee’s return to the 2013-low was, once again, triggered by an event in the US. This time, it was the US elections held on November 8 that caused the slide. Global markets had factored in a victory for Hilary Clinton. But Donald Trump’s surprise win triggered a sharp sell-off in risky assets such as equities, gold, silver and non-dollar currencies, especially those of the emerging economies.

The rupee, which was trading steady and stable in a narrow range between 66.3 and 67.2 for more than three months since August 2016, broke this band and fell, breaking below 68 to record its fresh low last month. Trump’s victory has also made FPIs pull out money from Indian debt. They sold over $3 billion in Indian debt and about $2.7 billion in the equity segment in November.

However, the recent fall to the new low of 68.86 did not jolt the market as it did in 2013. First, it was not as steep as earlier. Second, the macro-economic situation in the country has improved considerably compared to the earlier period. The trade deficit has narrowed to $10 billion. This has helped the current account deficit come down to just $277 million as of June 2016, from a deficit of over $21 billion in June 2013.

Forex reserves

The Consumer Price Index (CPI) inflation has eased from over 11 per cent in 2013 to 4.2 per cent. More importantly, the RBI has built strong forex reserves during this time which may be used to control volatility if there is any uncertainty. India’s forex reserves have risen from about $275 billion in September 2013 to $365 billion now — a whopping 33 per cent surge in the reserves!

All these factors have, since the beginning of this year, helped the rupee stay relatively stable in the 66 and 69 range, though other emerging market currencies have slumped against the dollar. However, if the FPIs continue to pull out money and intensify their selling spree, the possibility of the rupee tumbling to 70 levels in the coming months cannot be ruled out.