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Business News/ Markets / Mark To Market/  Covid-19 may be lethal for India’s economy but it ain’t bad for rupee
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Covid-19 may be lethal for India’s economy but it ain’t bad for rupee

Rupee’s drop to a new low on Thursday may seem perilous, but fall is lower than previous episodes
  • Collapse in oil prices, large forex reserves and recent measures by RBI are supporting the rupee
  • Rupee’s performance this time is far better than it was in the previous two episodes of sharp depreciationPremium
    Rupee’s performance this time is far better than it was in the previous two episodes of sharp depreciation

    The rupee has held up well in a hostile global market where many emerging market currencies have fallen victim to the covid-19 outbreak.

    The Indian currency hit yet another lifetime low of 76.50 per dollar on Thursday and has hardly been an outlier in the secular damage to emerging market currencies.

    However, the rupee’s performance this time is far better than it was in the previous two episodes of sharp depreciation.

    In the five-month period culminating with the collapse of Lehman Brothers in September 2008, the rupee had plummeted 15%. In 2013, five months following the US Federal Reserve warning of unwinding its stimulus, the rupee had lost 13%. In contrast, the currency has lost just 7% since mid-February.

    Down but not out.
    View Full Image
    Down but not out.

    What is working for it? Kamal Mahajan, head of treasury and global markets at Bank of Baroda, believes that the crude oil price collapse is a potent factor supporting the rupee. “Crude oil is very comfortable and we are not expecting prices at anywhere close to even $50 a barrel. That is giving support to the rupee. Capital (non-oil) imports are also lower, which is another comfort," he said.

    The collapse of global crude oil prices has been a boon for India as its import bill is set to reduce. A pleasant outcome of a bothersome slowdown is its effect on non-oil imports. Considering all this, economists expect the current account deficit to be small for the current fiscal year.

    Analysts at JPMorgan (India) Pvt. Ltd note that external debt of the country at $19.4 billion is low compared with peers.

    Add to this the fact that the Reserve Bank of India (RBI) has a huge pile of foreign exchange reserves to stave off pressure. The pressure on the exchange rate has meant that the central bank has been selling dollars incessantly and reserves may be down 3% in just two months. However, at $475.56 billion as of 31 March, they are still more than enough to ward off external sector pressures.

    The icing on the cake has been the recent measures by RBI to allow greater freedom to hedge exchange rate risks. The local bond market has been opened up and rules governing derivatives have been simplified to allow more hedging options for companies and even non-resident Indians. The central bank has also allowed Indian banks to trade in the offshore non-deliverable forwards market.

    However, all these positives are not prompting analysts to predict a strengthening of the rupee yet. That is because the virus outbreak is far from being contained in India and the economic impact is still unclear. Several positive factors are at play for the rupee and all it needs is for the covid-19 curve to flatten. Until then, analysts believe the pressure on the currency would continue, making it necessary for RBI to keep intervening.

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    Published: 09 Apr 2020, 10:37 AM IST
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