During the last 15 months, Euro fell by nearly 25%, Brazilian Real by 30%, Russian Ruble by 50% and Canadian dollar by 18% all against the USD. The INR is down only by 2%!
My previous article on Indian rupee was written during August 2013 titled “The Mega Rupee Slide” when Indian Rupee (INR) was sliding down as if there was no tomorrow. The question back then was, how low the INR will go and how can this be stopped.
Within two years, that question is now flipped over its face. This time around, the motivation to look at INR was for the opposite reason. When almost all global currencies are sliding down against US Dollar (as if there is no tomorrow!), INR is holding up quite well.
This indeed is a very strange situation for an emerging market like India. Can this hold up or Is this just a calm before the storm? This question is important for CFO’s, Foreign Investors, Importers, Exporters and finally NRI’s.
| Depreciation Relative to USD | 2014 | 2015-YTD(18th Mar) |
| Brazilian Real | -11.1% | -18.4% |
| Euro | -12.0% | -12.4% |
| Canadian Dollar | -8.6% | -9.3% |
| Australian Dollar | -8.4% | -7.1% |
| South African Rand | -9.7% | -6.6% |
| Indonesian Rupiah | -1.8% | -6.0% |
| Malaysian Ringgit | -6.2% | -5.7% |
| Russian Ruble | -43.3% | -5.4% |
| Singapore Dollar | -4.7% | -4.7% |
| Mexican Peso | -11.6% | -4.2% |
| Korean Won | -4.0% | -3.2% |
| Japanese Yen | -12.0% | -1.3% |
| Chinese Yuan | -2.4% | -0.5% |
| Hong Kong Dollar | 0.0% | -0.1% |
| Thai Baht | -0.7% | 0.0% |
| Taiwanese Dollar | -5.7% | 0.2% |
| Indian Rupee | -2.0% | 0.6% |
But before we answer that question, let us understand what has caused this rapid USD strength against Euro and other currencies. Euro has plunged by nearly 25% since 2014 beginning from 1.4 to nearly 1. The simple explanation to this unprecedented plunge of Euro is the divergent monetary policy of US and Eurozone. US is now in a tightening mode (means increasing the rates) while Eurozone is now in a loosening mode (means reducing the rates). So, when US rates go up and Eurozone rates fall, the spread widens and therefore causes more capital to flow back to US in search of more yields which then results in currency appreciation.
Why is INR so strong?
There are many reasons, but three stand out:
- “Strong” and improving Economy
- “Prudent” RBI &
- “Rocking” Capital markets
“Strong” Economy:
“India’s near-term growth outlook has improved and the balance of risks is now more favorable, helped by increased political certainty, several policy actions, improved business confidence, lower commodity import prices, and reduced external vulnerabilities” IMF, March 2015. That is a neat summary of where India is in terms of its economy.
| Economic Indicator | 2014/15 | Current Assessment | Future Assessment |
| Real GDP growth (%) | 5.6 | Rebounding | Positive |
| Inflation (%)-CPI | 6.7% | Reducing | Stable |
| Current Account Deficit (% to GDP) | -1.8% | Narrowing | Stable |
| Fiscal Deficit (% to GDP) | -4.4% | Declining | Declining |
| Forex Reserves ($b) | 340 | Strong | Strong |
| Public Debt (% to GDP) | 64.3 | Moderate | Moderate |
| Data Source: IMF | | | |
India is among very few countries in the world that is expected to clock decent real GDP growth for 2015 and beyond. IMF projects a growth of 5.6%