Rupee volatility

Expectations of higher growth in the US, fuelled by Donald Trump’s rise, a likely US Fed rate hike as well as demonetisation at home reasons for rupee’s weakening


Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

The Indian rupee has lost more than 2.5% against the dollar in November and is hovering near the all-time lows seen during the 2013 “taper tantrum”. The rupee is weakening primarily because of two reasons. First, capital is flowing to the US in anticipation of higher growth, as the incoming Donald Trump administration is expected to boost spending by running a higher budget deficit. The Federal Reserve is also expected to raise rates in December. Second, after the demonetisation of Rs500 and Rs1,000 bank notes, foreign investors are selling Indian stocks, as the currency crunch could affect economic activity and corporate earnings in the short run.

However, compared with 2013, India is in a much better position. It is growing faster, the current account deficit is under control, and the Reserve Bank of India has higher reserves, which can help in smoothening volatility. Also, what is comforting at this stage is that both the factors are transitory in nature and things are likely to stabilize as uncertainty recedes in coming weeks.

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