2 min read.Updated: 03 Mar 2020, 10:24 PM ISTAparna Iyer
Rupee drops below 73/dollar on Tuesday as the virus outbreak sends jitters across global markets
India’s weak economic growth, OECD’s cut in FY21 forecast weighed on sentiment for rupee
The month of March is typically good for the Indian currency as remittances, from both overseas citizens and companies, tend to buoy the exchange rate.
In the past decade, the rupee has appreciated seven times against the dollar in March. But March 2020 could be hard on the exchange rate and the rupee’s sharp drop to 73.25 per dollar on Tuesday is evidence of this. Offshore non-deliverable forwards are already predicting a further fall by the end of this month.
“If the situation onshore deteriorates further, triggering an exodus from domestic stocks and bonds, we could see the rupee weaken to test previous lows of around 74.50 against the dollar very quickly," said IFA Global, a foreign exchange broking and advisory firm, in a research note.
What has changed this March?
The rupee has had to deal with an unexpected virus outbreak that threatens to derail global growth, besides claiming lives across continents. As the coronavirus continues to disrupt trade and supply chains between countries, an already weak Indian economy is giving forex dealers some jitters. “The contagion effect will become the primary driver sidelining other external factors such as dollar index, crude oil, and yuan if coronavirus turns into a global pandemic," said the IFA Global note.
India’s gross domestic product (GDP) growth was 4.7% for the December quarter. Adding to the pain is the axe that the Organisation for Economic Co-operation and Development (OECD) brought down on its FY21 forecast for the country’s GDP growth.
A slowing economy has little firepower to withstand a viral onslaught on business and market sentiment. What makes it even more painful for the rupee is that China, the epicentre of the coronavirus outbreak, accounts for about 10% of India’s total trade.
In light of all this, the nearly 3% fall in the rupee ever since the outbreak of the virus seems warranted.
But policymakers are unlikely to sit on the sidelines when currency markets are roiled. The Reserve Bank of India (RBI) on Tuesday issued a pithy statement saying that it is monitoring markets closely and will swiftly respond to any negative events.
RBI joins global central banks in making the necessary noises of cutting policy rates and giving financial stimulus to blunt the coronavirus epidemic’s impact on the world economy. The Reserve Bank of Australia has already taken the first step by cutting its policy rates.
Given the weak position of the Indian economy and the limited fiscal and monetary space to give a stimulus, sentiment towards Indian equities and bonds have soured. The rupee, no doubt, would be the casualty in this. Meanwhile, some good old central bank intervention might just be the cure for the exchange rate to recoup. Although a dollar buyer of late, RBI could make an exception so that March may be manageable if not mellow for the rupee.
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