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With the US Federal Reserve hiking rates by 50 basis points, there has been a sell-off in global markets as investors have rushed to the dollar. On Monday, the Indian rupee fell to an all-time low of 77.6 against the dollar during intraday. While it has pulled back marginally since then, the rupee has, of late, been exhibiting signs of weakness. However, the Indian currency is not an outlier. Currencies of most other emerging economies have also exhibited weakness against the dollar. In fact, of late, the Turkish lira, Malaysian ringgit and Thai bhat have declined more sharply than the rupee according to analysts at Bank of Baroda. Notwithstanding these day-to-day fluctuations, the outlook for the Indian rupee continues to be weighed down by tighter global monetary policy, a strengthening of the US dollar and risk aversion, and higher current account deficits.
With the US Federal Reserve hiking rates by 50 basis points, there has been a sell-off in global markets as investors have rushed to the dollar. In India, foreign portfolio investors have pulled out around $5.8 billion since the beginning of this financial year as per data from Kotak, exerting downward pressure on the currency. The DXY index — which measures the US dollar against six major currencies, namely the euro, pound, Canadian dollar, yen, Swedish kroner and Swiss franc — has been rising. This strengthening of the dollar is unlikely to be reversed in the near term. As the US Fed embarks on an aggressive tightening of rates — some analysts are factoring in a terminal rate of more than 3 per cent — asset classes across the world will witness further adjustments. There is also the pressure owing to the rising trade deficit — in April the deficit stood at $20 billion, up from $18.7 billion in March. In fact, according to analysts, the current account deficit is likely to be at its highest level since the crisis of 2013.
During this period, the Reserve Bank of India (RBI) has been intervening to soften the currency’s slide — the fall in its foreign exchange reserves suggests that is the case. However, considering that the rupee is overvalued, the central bank should allow the currency to slide, allowing it to find its own level, intervening only to smoothen excess volatility. Currency depreciation will act as an automatic stabiliser. It will help ease current account pressures by curbing imports, but more importantly, it will help boost exports — a critical driver of the country’s economy at the current juncture.
This editorial first appeared in the print edition on May 12, 2022 under the title ‘Let rupee fall’.
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