Sinking rupee

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 Sinking rupee

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• Rupee’s continuing problems: The RBI has to make a plan to tackle the weakening rupee, against a strengthening dollar. Worst historic level  was touched on 28 June when it crossed 69 to a dollar.
• EMs hit hard: All EM currencies are doing badly, and INR is down 8% since Jan 2018, worst in Asia. The MSCI EM Currency Index is down. The Dollar Index is up 7.5% this year.   CONCEPT
• Facts for 2018-19: (a) Importers have to give more $ as crude prices go up, so INR drops. (b) CAD can go to 2.5% of GDP in FY19. That is an unsustainable levels if exports don’t do well. (c) That can push $ demand too high, leading to rupee dropping further. (d) Trade war is intensifying, but its impact on rupee still unclear. (e) US Federal Reserve’s monetary policy tightening (and FPI outflows from EMs) biggest reason.
• FPI investors: They want higher returns from the US. Hence, exit from the EMs. FPI exit amounts were Rs.29 k cr in May and Rs.15 k cr in April 2018. All this largely from bond markets => Fall in bond prices.
• Traditional cycle: This was expected post Fed’s tightening. But has happened quickly. More interest hikes are in the offing => More downward pressure on rupee.
• A 2013 style crisis: The RBI and GoI have to find some innovative solutions to avoid taper tantrum 2013 crisis that sunk the UPA.   CONCEPT
• Summary : The US Federal Reserve’s monetary tightening has hit INR hard, and other factors have played along. Time for innovative thinking to avoid a 2013 style crisis.

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