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The Indian rupee’s 1.5 per cent decline against the US dollar in 2013 has stoked fears of costlier imports and a worsening balance of payments situation. But the rupee hasn’t fared so badly when compared to other global currencies so far this year.
The rupee’s fall this year comes in the wake of a 3.1-per cent decline in 2012. A larger fall has been avoided due to significant inflows of foreign capital into the equity market, but demand for the US dollar from importers such as oil companies exerted pressure on the rupee.
BRICS grouping
Among India’s peers in the BRICS grouping, South Africa’s rand has been one of the worst performers of the year, plummeting 11.1 per cent. The Russian ruble has also fared worse than the rupee, depreciating by 2.1 per cent. But Brazil’s Real has appreciated 0.6 per cent and China’s renminbi by 1.7 per cent.
All the G-10 currencies have performed worse than the Indian rupee against the dollar in 2013. The Swedish Krona, the best-performer out of the G-10 currencies, is down 1.6 per cent, while New Zealand’s dollar has lost 1.8 per cent and the Danish Krona 2 per cent.
The euro has fallen by 1.1 per cent and the British pound by 7.1 per cent. The Japanese yen was the worst performer in the grouping, having lost 15.7 per cent against the US dollar since the start of the year. But this is on account of steps taken by the Japanese government to depreciate the currency so that exports get a fillip, a strategy that has been decried by the US.
The performance of the US dollar over the last five months was supported by the improved economic situation in the country. A rebound in the housing market is expected to push up US economic growth to 2.2 per cent in 2013, up from 1.7 per cent in 2012 and 2 per cent in 2011. Besides this, the US Federal Reserve’s announcement that it will continue to buy bonds has propped up the US currency.
In contrast, sticky consumer price index (CPI) inflation of around 10 per cent in the world’s largest democracy and a slowdown in industrial production to single digits have hurt the outlook for India’s rupee. The country’s current account deficit – hovering at 6.7 per cent of GDP in the third quarter of 2012-13 – is at unacceptable levels and rupee depreciation exacerbates the payment burden further. India’s foreign exchange reserves will also be whittled down by depreciation of other currencies against the US dollar.
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