I am surprised hearing the reactions from people across the board regarding the weakening of the rupee. In the chart below, I have taken data from January 1992. In 1991 we had just liberalized our economy and the rupee entered the free-float zone. Prior to this it was more or less managed by the RBI. If you look at the rupee, between 1992 to 2002 the Indian currency has broadly depreciated by 6%. The golden years were from January 2002 to January 2008 when the rupee actually appreciated. Post that, again the Rupee has depreciated.
If you ask any observer, expectation is that the rupee has to depreciate. The logic for the rupee depreciation is very simple – inflation and interest rate difference. The quantum of the depreciation is arguable but directionally the rupee had to weaken. India always had a current account deficit (CAD) on account of its dependence on oil imports. Over the last 20 years, the domestic production of oil is getting marginalized. On top, oil prices have gone through the roof. To add fuel to fire, increase in oil prices has not been passed on to the customer because of obvious political reasons. Thanks to distorted prices, demand is not coming under control.
The next item on our import bill is Gold. India’s love with the yellow metal has been there and continues to remain so despite the FM making fervent appeals ‘Not to Buy Gold’. We should safely assume rupee has to depreciate 5% every year. This does not happen in an organized manner given other variables like global macro economic factors, politics, quantitative easing, Indian capital inflows etc. So you have a period of distortion followed by violent catching up. We are in midst of one such violent catch up.
There is no point panicking or asking RBI to intervene. The RBI is a very smart and seasoned regulator and it knows what to do. The other indicator is the forex market overseas. 6-7 months ago the 60 rupee-dollar calls became active. The same gets reflected in the one year rupee forward hedge costs. If rupee does not depreciate – you can easily make what in trading terms is called arbitrage profits. There may be times when arbitrage is possible but not always. Else the world and his father will borrow dollars at 2% or even lower and invest in Rupees at 8% and make safe returns.
I think rupee depreciation will happen and hope there is no jingoistic stance in keeping a strong currency. After all, we are not like China or America who are world super powers. We should realize that India Shining or India not Shining and India’s economic powers are more in the eyes of consultants and Politicians who can sometimes wax eloquently about India. The reality is that the economy is in bad shape, inflation is not really under control, capex cycle is stalled, there is frustration everywhere and all that cumulatively is reflecting in the weak rupee.
Before I conclude, Union Petroleum and Natural Gas Minister Veerappa Moily has said that that every oil minister is threatened by import lobbies. He says India is floating on huge reserves of oil and gas which are not explored for the benefit and profit of oil import lobbies. The solution to Rupee strengthening is not in hands of FM but in hands of Oil and Gas Minister and we should start our reliance on domestic natural gas.
And last words on the INR – don’t be surprised if it goes to 63 in medium term and also more than 63.