Let’s fix this rupee volatility

V. Shunmugam | Updated on March 09, 2018


Instead of short-term flows, domestic savings and NRIs should play a bigger role in the capital market.

When the rupee slipped from 56.64 to 59.70 between June 11 and June 20, it created a panic. Policymakers had to assure stakeholders that all is well, and that a lot will be done to ensure that the rupee will continue to chart its fundamentals.

The performance of emerging market currencies reveals that the rupee’s performance is no isolated episode. In fact, it has done much better than the currencies of Brazil and South Africa.

Keeping aside the differences in the fundamentals of these currencies, there was a common thread that brought about the currency nosedive — the markets’ fear over Fed’s indication that it will taper off its asset purchase programme.


During the past one month, while the rupee depreciated by 8.5 per cent, South Africa’s Rand, and Brazil’s Real have depreciated by 9.5 per cent, and 10.8 per cent, respectively. An obvious difference that would set India aside is that it is not a commodity economy.

Looking at the current account deficit, it appears that the market had figured in India’s strengths in its Net International Investment Position (NIIP).

Forex reserves with the central bank at the current level have not deteriorated to an alarming extent; they can support an estimated seven months’ imports.

This being the situation, it is important that market stakeholders insulate themselves from ‘noise’ that doesn’t have much relevance to the price discovery process of a currency.

With Indian economy entering the trillion dollar club, India’s NIIP as a percentage of GDP is estimated at around 15.5 per cent in 2012, far better than countries such as Australia, Brazil, the UK and the US.

However, what matters to the market is the state of capital flows in either direction, especially at a time of crisis. While most of India’s foreign assets are in a solid state, liquid liabilities accounted for the bulk of the liabilities side of the balance sheet.


We need policy measures that nudge an increasingly higher flow of domestic savings into our capital markets. This would enable the economy to better withstand external shocks.

These external factors per se may not hold much relevance for Indian capital markets, except for impacting market valuations for a short period through trade flows and currency fluctuations. They assume importance because global inflows are significant.

Managing the firmness of the flows through monetary policy would not serve the long-term interests of the economy.

Rather, FDI inflows that are likely to be long-term in nature will act as a stabilising influence.

Such inflows could expand India’s access to key resources — those that form a major part of its CAD, such as crude oil, natural gas, coal, among others.


While efforts are on to develop the skill sets of the existing population and liberalise labour movement through global trade talks, it is time that we considered NRIs as a group and liberalised norms so that they can invest their hard-earned forex into productive avenues in India.

This would include stock markets and increased access to direct intermediation i.e. broad-basing the existing qualified foreign investor/NRI norms, besides working with regulators to expand intermediation of Indian markets.

As it would represent that portion of their savings which will not be retrieved at least in the medium term, it could help firm up the liability side flows into our economy.


India being a resource-constrained economy, CAD will remain a burden until long-term strengths of the Indian economy are leveraged effectively.

However, measures at improving energy efficiency — such as more dynamically linking prices of crude derivatives with global crude oil prices and currency rates; promotion of energy efficiency to increase the GDP/energy ratio, and that includes strengthening infrastructure and public transportation; and incentivising energy efficient machinery at production level — will have a positive effect on CAD.

Creating and promoting efficient hedge structures with exposures on both the import and exports front will help strengthen our exporters vis-à-vis their global counterparts. It will help expand their exports even at a time when currency volatility turns abnormal.

Existence of a market beyond the current working hours to incorporate risks from information that crosses shores would be critical to this efficiency, as overnight spreads cost a lot to those with uncovered positions on both sides.

In a world that is increasingly interconnected with rapid information flows, it is not currency depreciation/appreciation that helps boost or curtail exports/imports but the ability of stakeholders to hedge effectively; that will help improve trade competitiveness and manage CAD at tolerable levels.

If we take Indian economy as an enterprise which works in an integrated global marketplace with competing products and services, its valuation is largely reflected in its exchange rate.

Unlike in equity valuation, this equity price of the nation (exchange rate) itself is measured in terms of dollars (the stock price of another competing economy).

It is essential that India takes its balance sheet (Net International Investment Position) and the income statement (trade flows) and various other macro financial ratios to optimal levels.

It would help India to deal with shocks that information from various competing economies could produce in a better way.

That would provide for reasonable stability in economic management and policymaking.

(The author is Chief Economist with MCX-SX. Views are personal)

Published on June 23, 2013

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