A depreciating domestic currency doesn’t only mean a more expensive trip abroad; more expenses on Higher education in the United States, or importing a sports bike. It could hold back a drop in home loan EMIs and pull down investment returns. Hence, here are some of the most common questions that come to mind.
Why now?
It was about to happen. India consumes a lot more than what it produces. The extra dollars the country needs comes from large foreign investors who bring in dollars to buy Indian stocks and bonds. Economists call it funding the 'current' account deficit with 'capital' flows. There are fears that matching the flows may no longer be that easy in the near future.
Why? Don’t Brazil, Indonesia and South Africa do the same?
They do and the values of all these currencies are falling against the dollar. Capital flows from abroad aren't a problem when cheap money is available around world markets. This has been the case in the last few years with Fed, the US central bank, buying bonds and pumping money as it waited for the world's largest economy to come out of coma.
They do and the values of all these currencies are falling against the dollar. Capital flows from abroad aren't a problem when cheap money is available around world markets. This has been the case in the last few years with Fed, the US central bank, buying bonds and pumping money as it waited for the world's largest economy to come out of coma.
The Fed is not doing it immediately. So, why is there panic? Won’t a recession in china soften commodity prices and help India?
Financial markets are driven by herd mentality. Lower price of oil and other commodities may help India six months later. But for the moment the trading call is: sell bonds, stocks, and currencies of countries that have high current account deficit. Even if a trader thinks differently, he is forced to join the sellers as security prices slip. In fact, currencies of Australia, South Africa, and Brazil which export commodities have fallen more than the rupee.
Financial markets are driven by herd mentality. Lower price of oil and other commodities may help India six months later. But for the moment the trading call is: sell bonds, stocks, and currencies of countries that have high current account deficit. Even if a trader thinks differently, he is forced to join the sellers as security prices slip. In fact, currencies of Australia, South Africa, and Brazil which export commodities have fallen more than the rupee.
What can authorities do?
Besides changing rules to lure more foreign direct investment, there are talks of floating a special deposit scheme or offshore bonds for NRIs. Such schemes have worked before with SBI spearheading it. Here, the risk of foreign exchange fluctuation is borne by the government. A $15-20 billion inflow from such a scheme can, to an extent,stabilise the rupee. While the money has to be repaid three to five years later when the deposit (or bond) matures, there was very little outflow in earlier schemes as most NRIs preferred to park the money with Indian banks instead of withdrawing it.
Besides changing rules to lure more foreign direct investment, there are talks of floating a special deposit scheme or offshore bonds for NRIs. Such schemes have worked before with SBI spearheading it. Here, the risk of foreign exchange fluctuation is borne by the government. A $15-20 billion inflow from such a scheme can, to an extent,stabilise the rupee. While the money has to be repaid three to five years later when the deposit (or bond) matures, there was very little outflow in earlier schemes as most NRIs preferred to park the money with Indian banks instead of withdrawing it.
Why isn't RBI doing anything? Isn't it supposed to defend the currency?
The central bank possibly feels that it wouldn’t be prudent to intervene and take on these bigger global market forces. Rupee's fall in end May and early June was due to huge bond sell offs by foreign funds that are short-term traders trying to make quick money. Recently, trading rules were simplified and foreign investment limit in bonds were raised to attract investment. But this was hot money that came in fast, left in a hurry and may again return. Such investors may continue to fuel the ups and downs in the rupee.
The central bank possibly feels that it wouldn’t be prudent to intervene and take on these bigger global market forces. Rupee's fall in end May and early June was due to huge bond sell offs by foreign funds that are short-term traders trying to make quick money. Recently, trading rules were simplified and foreign investment limit in bonds were raised to attract investment. But this was hot money that came in fast, left in a hurry and may again return. Such investors may continue to fuel the ups and downs in the rupee.
