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Why US recovery is good news for the rupee

July 10, 2013 10:53 IST

Why US recovery is good news for the rupee

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Manojit Saha in Mumbai


Any news coming from the US has strong influence on the fortunes of the Indian currency. Information that gave the impression that the US Fed will taper its asset purchase programme - quantitative easing or QE 3, saw investors rush toward the greenback, which has strengthened against major currencies.

The non-farm payroll data, which came over the weekend, was also better than the Street expectations, suggesting high chance of the Fed withdrawing its QE programme, as the country is on the path of recovery.

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Image: Federal Reserve building in Washington, DC.
Photographs: Joshua Roberts/Reuters
Tags: US Fed

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Why US recovery is good news for the rupee

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As a result, the rupee on Monday morning depreciated sharply breaching the 61-per-dollar mark to hit a new all-time intra-day low. But if the US is recovering, though there will be immediate pressure on the rupee, it also spells good news for the battered currency from the medium-term perspective.

Since the start of the financial year, the rupee’s performance against the dollar has been worst among Asian currencies and Brics (Brazil, Russia, India, China and South Africa) economies, barring South Africa’s rand.

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Image: South African bank notes featuring an image of former president Nelson Mandela are displayed at an office in Johannesburg.
Photographs: Siphiwe Sibeko/Reuters

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Why US recovery is good news for the rupee

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This was particularly because the country is running a high current account deficit. India’s foreign exchange reserves, which can cover imports for about six-and-a-half months, have also made the Reserve Bank of India cautious in using those to arrest the fall of the rupee.

India’s CAD hit 4.8 per cent of the gross domestic product in 2012-13, a record high on the back of burgeoning trade deficit, along with a significant decline in invisible earnings. The trade deficit in 2012-13 remained at an elevated level of $195.7 billion due to a decline in merchandise exports by 1.1 per cent and a rise in imports by 0.5 per cent.

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Image: Reserve Bank of India building in Kolkata.
Photographs: Rupak De Chowdhuri/Reuters

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Why US recovery is good news for the rupee

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In CY2012, merchandise exports to the US grew 12 per cent, much lower than 22 per cent registered in the previous year. US accounts for about 10 per cent, or $35 billion, of India’s exports. In fact, thanks to stronger growth in US markets, Indian information technology and pharma companies are expected to report good performance and thereby account for a large share of earnings growth in June quarter.

In this context, a recovery in the US economy will have a fundamentally positive impact on India’s trade deficit and GDP growth. According to experts, it is the worsening trade deficit which is seen as a key pressure point on the rupee, though factors like upward pressure on crude oil price and rising gold consumption has also contributed.


Image: Cars queue for petrol in Dubai, United Arab Emirates.
Photographs: Ghazal Watfa/Reuters

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