Mumbai: The rupee has gained some lost strength against the US dollar this past month, but its recovery is at a lethargic pace compared with other Asian currencies, as investors wary of India’s current account and trade deficits prefer other emerging markets in the region.
Also See How They Stack Up (Graphic)
Between 11 February and Monday, the Indonesian rupiah has strengthened 14.16%, South Korea’s won—the worst performing Asian currency in 2008—has recovered 12.58%, while the rupee has depreciated 1.65%, according to Bloomberg data.
To be sure, the rupee has strengthened from its all-time low of 52 against the US dollar in early March to close at 49.51 on Monday, up some 5% since then, but it’s still a laggard. Other Asian currencies, too, are struggling to recover from their 12-month lows.
Except the Chinese renminbi and the Hong Kong dollar, which have since gained against the US dollar, all the other Asian currencies are at varying degrees of depreciation against the greenback.
Asian currencies typically move in tandem because they depend on exports and foreign institutional inflows into the equity market.
“We have to realize...when the world currencies depreciated against the dollar last year, they depreciated at a much faster pace than the rupee. They are now recovering from their lower lows,” Jamal Mecklai, chief executive of foreign exchange at consulting firm Mecklai Financial Services Ltd, said on Monday.
For instance, in 2008, the South Korean won dropped some 26% while the rupee fell 19%. The South Korean won is recovering fast now due to larger inflows of foreign funds into the country.
In the past month, foreign institutional investors have bought net $676.4 million (Rs3,328 crore today) in Indian equities against $1.3 billion in the South Korean market.
“The currency market is very sensitive to fund flows. Investor appetite for Asian markets has risen significantly now as people are expecting that the worst of the (global economic) slowdown may be over. Rupee has to strengthen going forward,” said N.S. Paramsivam, head of treasury at Essar Group.
The rupee will strengthen to 47 a dollar in about three months once a stable government is installed at the Centre, Paramsivam said.
Harihar Krishnamurthy, head of treasury at the Indian subsidiary of South Africa-based FirstRand Bank, said it is the state of the Indian economy rather than political uncertainty that’s slowing the rupee’s recovery.
India’s balance of payments for the quarter ended 31 March shows that its trade deficit, or the difference between what it exported and imported, shrank to $4 billion, from $6.3 billion a year ago.
Exports fell 33.3% and imports declined 34% due to declining commodity prices.
“Trade deficits have narrowed, but they have not collapsed. Inflow has turned positive only recently in April,” said Krishnamurthy.
Many Asian countries run a current account surplus, which means their exports are more than their imports. India’s current account deficit is about 3% of its gross domestic product (GDP).
“Before the crisis, it was a one-way play. People were buying emerging markets and the risk perception was low,” said Mecklai. “After the crisis, investors are micro-managing their investments in individual countries. I would say when (the) global recovery happens, rupee will take some time to recover. We are not going to recover so quickly because of our deficits.”
However, the rupee might be doing just fine being in a depreciating environment.
Independent foreign exchange consultant A.V. Rajwade said: “There is a variety of reasons why the rupee has not strengthened like other Asian currencies, but in this type of condition, it is bad for the rupee to appreciate. It is deflationary. Do we want deflation at this point of time?”
Graphic by Ahmed Raza Khan / Mint