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BW Businessworld

Whither The Rupee?

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As someone told me a couple of days ago, we live in a ‘VUCA’ world: volatile, uncertain, complex and ambiguous. And nowhere has that been more evident than in the currency markets these last few days. The rupee, hit its all-time low on June 10, at Rs 57.80 to the US dollar, triggered perhaps by belied expectations that the Reserve Bank of India (RBI) would intervene to arrest the fall in the rupee’s value (RBI Governor D Subbarao explicitly said they wouldn’t).

Talk to the experts, and they’ll tell you that the ‘correction’ in the rupee’s value is overdone, and that the rupee is undervalued by about 6 per cent. They are going by the real effective exchange rate (REER), which was 94 for April this year, the latest month for which the number was available; for March it was 106, so the yo-yo feeling is understandable: that’s the volatility we have to deal with.

Our currency’s value is also determined by other factors, like foreign investor sentiment (their confidence in our markets and economy) in global markets; after four months of high capital flows, a sudden withdrawal and outflow of debt payments caught a lot of folks by surprise, making them much more uncertain.

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Global currency markets haven’t been very predictable either; last week, the British pound gained the most it had in three years (from October 2009) against the US dollar: 2.4 per cent. The Bank of Japan announced its own version of QE (quantitative easing) even as the European Central Bank (ECB) and the US Federal Reserve Board are said to be considering quantitative tightening.

By increasing the monetary base (High-power money, which is currency in circulation plus bank reserves – their equivalent of our cash reserve ratio) by 50 per cent, the Japanese plan seems to be to inflate their way into growth. Add the slower-than-anticipated growth of the US economy, the possibility that other small European economies might need help like Greece and Cyprus did, and the complexities multiply.

Over the last 5 to 6 years, the composition of our external debt is changing and its size of is growing.  Short-term debt was just 4 per cent of our total debt in 2007; it’s over 23 per cent now, and growing. Our foreign currency reserves in 2007 were more than 100 per cent of total external debt; today, they’re about 80 per cent.  Our current account deficit is not getting any easier to manage: just look at

So the RBI sounds hawkish about the prospects for the next few months, but the government appears to believe that the rupee’s rapid descent is only temporary. It’s not clear whether anyone is reading the signs clearly; we are getting mixed signals for sure. The reality is hazy, and ambiguous.

When we lived in a world of problems, the road to the solution was clear: analysis and action, keeping speed essential. Today’s world is one of dilemmas, which need patience and time: in other words, the long view. But there doesn’t seem to be any appetite for it. So we’ll continue to navigate this VUCA world as best we can, and hope for the rupee to bounce.