With a rising dollar putting even developed market currencies under pressure, one can see why Finance Minister Nirmala Sitharaman and the Reserve Bank of India Governor Shaktikanta Das have been at pains to talk up the rupee lately. When the rupee breached 81, Sitharaman said that it has held up much better against the greenback compared to other currencies. Das in his monetary policy review tried hard to allay concerns on India’s balance of payments and foreign exchange reserves situation. Allaying fears that the RBI’s defence of the rupee was depleting forex reserves (down from $640 billion to $537 billion) he clarified that 67 per cent of the fall came from currency fluctuations. While these favourable data points are well-taken, they can reverse at any time if a sudden bout of global financial market turbulence hits. Therefore, RBI and the Centre cannot afford to dial back on their attempts to encourage the influx of dollars and must be prepared to ward off a speculative run on the rupee.  

Though India’s April-June Current Account Deficit came in lower than market expectations of 3.6 per cent, the trade deficit has worsened in subsequent months. Merchandise imports have jumped by 43.1 per cent and 36.7 per cent in July and August 2022, respectively, while exports have flatlined. These trends may persist. With advanced economies staring at recession, India’s commodity-focused merchandise exports are vulnerable both to a squeeze in realisations and drying up of demand. Imports, on the other hand, are seeing a strong resurgence on the back of the economic revival post-Covid. Inward remittances have so far proved a blessing, piggybacking on NRI incomes rebounding from Covid. But with developed markets now accounting for the bulk of India’s remittances, it is moot if these inflows will remain bubbly if the US and UK slip into recession. Buoyant software exports have helped bridge the merchandise deficit so far, but this is again contingent on clients of IT companies in North America and Eurozone retaining their budgets amid recession.

Yes, for foreign investors, India offers many positives right now. Driven more by domestic consumption than global trade, India’ is the only large economy set to grow at 7 per cent this year. Its government and central bank have been prudent in their rollout and withdrawal of Covid stimulus, and the sovereign is free of external debt troubles. In India, inflation and rising rates do not pose an insurmountable threat to growth. Though all this argues for a TINA factor to operate in favour of India, FDI and FPI investors do not always go by fundamentals alone. Every bout of global turmoil in the past has seen them stampede out of emerging markets. India should brace itself to counter-balance a receding tide of global liquidity. Recent measures such as rupee settlement of trade and easier ECB rules should be continued, but interventions that worked in 2013 — such as the dollar-swap window for oil companies and exchange-rate protected FCNR deposits — should also be on the table.