Tucked away in the news stream of the past few days has been a developing situation in India. Whilst the headlines have been made by Turkey there have been currency issues in the largest part of the sub-continent as well. Here is DNA India on the subject.
Indian Rupee on Thursday had hit a fresh record low, the Rupee opened at 70.22 versus the US dollar. In wake of the Turkey crisis, the Indian currency started off the session on a weak note. Earlier on Tuesday, after opening at a marginal high of 69.85 against the US Dollar, the Indian rupee touched an all-time low of 70 per US dollar.
The Indian currency touched an all-time low of 70.08 against the US dollar, while marking depreciation of around 10 per cent in 2018.
The fall came majorly due to a drop in Turkish Lira, which helped the US dollar to gained strength on the back of fears that economic crisis in Turkey could spread to other global economies.
In fact it fell to 70.7 this morning versus the US Dollar which is an all time low. Some of the move may have been exacerbated by the issues facing Turkey but over the past couple of days the Turkish Lira has rallied strongly whereas the Rupee has continued to fall. A factor has been the strength of the US Dollar or what is being called King Dollar. This reminds me that themes and memes can change rather quickly in the currency world if we step back in time to the 25th of January.
“Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin told reporters in Davos. The currency’s short term value is “not a concern of ours at all,” he said.
If pressed now I guess the US Treasury Secretary would emphasise this bit.
“Longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency,” he said.
Returning to the Rupee we see that it had started to fall before the turn in the US Dollar as conveniently it began at the turn of the year when it was at 63.3 versus it.
What are the consequences?
The first is simply inflation or as DNA India puts it.
Continuous downfall in Indian Rupee is worrisome for imported goods as the cost of imports will go up. Currently, India imports around 80 per cent of its crude requirement. The rupee downfall will expand India’s import bill and will eventually be contributing to the inflation.
This will add to the situation below. From The Times of India.
Inflation based on consumer price index (CPI) for the month of July came at 4.17 per cent, government data ..
That was an improvement and as so often in India the swing factor was food prices.
The food inflation came at 1.37 per cent, driven by cooling of pulses, vegetable and sugar rates.
However a boost is on its way and as inflation is above the 4% target things could get especially awkward should food prices swing the other way.
One of the economics 101 assumptions is that higher interest-rates boost a currency but as I warned back on the 3rd of May the situation is more complex than that and Argentina reminded us again by raising to 45% earlier this week. As for India we see this.
increase the policy repo rate under the
liquidity adjustment facility (LAF) by 25
basis points to 6.5 per cent. ( Reserve Bank of India August Bulletin)
That was the second rise this year and these have reversed the previous downwards trend. Of course the problem is that the RBI is perhaps only holding station with the US Federal Reserve.
India maintains a sizeable foreign currency reserve which was US $406 billion at the last formal update in March. However it will not be that now if this from Reuters on Tuesday is any guide.
Subhash Chandra Garg, secretary at the department of economic affairs…………said the RBI has spent about $23 billion so far to intervene ..
Anyway using reserves can help for a while but care is needed as quickly markets switch to calculating how much you have left and how long they will last at the current rate of depletion. At that point intervening can make things worse.
Looking at India’s domestic economy a clear factor in the currency debate is its trade position. The latest numbers were as highlighted above by DNA India heavily affected by the oil price.
Oil imports during July 2018 were valued at US $ 12.35 Billion (Rs. 84,828.57 crore) which was 57.41 percent higher in Dollar terms and 67.76 percent higher in Rupee terms compared to US $7.84 Billion (Rs. 50,565.29 crore) in July 2017.
Such a development feeds into the existing Indian trade problem.
Cumulative value of exports for the period April-July 2018-19 was US $ 108.24 Billion (Rs 7,29,823.08 crore)……….Cumulative value of imports for the period April-July 2018-19 was US $ 171.20 Billion (Rs. 11,54,881.70 crore).
Whilst a little care is needed as petroleum exports grew by 30% overall Indian export growth is on a tear at 14%. Many would love that, but the rub is that not only are imports much larger but due to India’s oil dependency they are rising at an annual rate of 17%. So as we stand things are getting worse and according to Business Standard there is trouble ahead.
India’s crude oil import bill is likely to jump by about $26 billion in 2018-19 as rupee dropping to a record low has made buying of oil from overseas costlier, government officials said today…….. If the rupee is to stay around 70 per dollar for the rest of the ongoing fiscal, the oil import bill will be $114 billion, he said.
The other side of the coin about the Indian economy was highlighted by the IMF only last week.
India’s economy is picking up and growth prospects look bright—partly thanks to the implementation of recent policies, such as the nationwide goods and services tax. As one of the world’s fastest-growing economies—accounting for about 15 percent of global growth—India’s economy has helped to lift millions out of poverty.
Although developments since the writing of the report may have more than a few wondering about this bit.
India can benefit from improving its integration with global markets.
Perhaps it is a case of Blood,Sweat and Tears.
What goes up must come down
Spinnin’ wheel got to go ’round
There was of course the domestic issue created by the demonetisation debacle not that long ago but the real achilles heel for India is oil. Something of a perfect storm has hit it where the oil price has risen by 40% over the past year and more recently that has been exacerbated by a stronger US Dollar.
So both the economic and Rupee issues seem as much to do with energy policy as conventional economics. Can India find a way of weaning itself off at least some of its oil dependency?
Me on CoreFinance TV