'In the long run, India's strong growth story and reforms to make assets globally attractive will determine the rupee's resilience.'
The rupee touching the 90 mark against the US dollar has sparked fresh worries about inflation, global trade, and investor sentiment. To understand what's really happening, Rediff spoke to Taponeel Mukherjee, Principal and Co-founder of AltG, a global investment and economics advisory firm.
A seasoned economist, investor and former interest rates trader with over two decades of experience in global markets, Mukherjee explains that the rupee's fall is not a sign of economic weakness but rather a reflection of short-term market uncertainty and global money movement.
What are the main factors behind the rupee's sharp fall to the 90 mark against the US dollar?
Given the inflation differential (the difference in price rise between two countries over time) between the USA and India, some general weakening of the rupee against the dollar is expected.
The main drivers of the rupee's sharp fall are essentially the market asking for more clarity around the US-India trade deal and a short-term rebalancing of portfolios (investors-foreign institutional investors -- shifting money between countries or assets to reduce risk or chase better returns), leading to money moving out of Indian assets (like stocks) into the US.
Structurally, the markets and investors need more clarity around the way forward to increase their allocations in India.
To what extent is this depreciation driven by external factors such as a stronger US dollar and Donald Trump's tariff hikes?
Trump's tariff hikes are responsible for some of the weakening in the rupee versus the dollar. While the market is confident of a solution being reached (between the two countries on reduction of tariffs), the need for clarity on the timeline and the resulting volatility has been a factor that has hurt the rupee.
The Dollar Index (a measure of the US dollar's strength against major global currencies) has gone lower this year from around 109 to the 99 range, indicating that the market expects the US Federal Reserve to be more dovish (reduce interest rates) going forward.
In short, external factors are partially responsible for the weakening of the rupee.
Has the Reserve Bank of India been intervening in the forex market to stabilise the rupee, and how effective can such measures be at this stage?
The RBI has been intervening in the forex market to stabilise the Indian currency with the aim of ensuring an orderly market. Its stance has always been to allow market forces to generally determine the exchange rate, with the caveat that there shouldn't be excessive volatility.
The RBI intervenes both in the spot USD-INR market (where dollars are bought or sold immediately for rupees) to smoothen market volatility and in the forwards market (where deals are made today for buying or selling currency at a future date) to influence the 'expectations of the path' (how investors think the rupee will move in the future) that the currency will take.
However, it should be noted that the aim of these interventions is to avoid excessive volatility.
How does the fall in the rupee impact India's inflation outlook and the RBI's monetary policy decisions going forward?
Given the currency depreciation, one would expect some inflation to be imported via energy imports (as India pays more rupees for oil and gas priced in dollars). However, given inflation readings of the recent past, we do not expect hawkish monetary policy (policy focused on raising interest rates to curb inflation).
Based on current data, we do not see the RBI hiking rates to tackle higher-than-expected inflation.
Which sectors of the Indian economy are likely to benefit from a weaker rupee, and which ones will be adversely affected?
Beneficiaries:
Losers:
Does the rupee's fall reflect a fundamental weakness in India's economy, or is it largely a result of global currency dynamics?
Absolutely not! The rupee's fall is a short-term shock and does not reflect a fundamental weakness in India's economy. India is and will continue to remain the world's fastest-growing economy.
However, the rupee's fall does highlight a fundamental point about currency markets -- while fiscal policy (how the government raises and spends money) and monetary policy (how the central bank controls money supply and interest rates) are big drivers, global demand for a country's assets -- from equity to debt -- is equally crucial.
In essence, it's about how valuable investors perceive Indian assets to be relative to US assets.
India has made great progress in attracting global investors since the 1991 liberalisation. But the current weakness in the rupee shows that there's still room for improvement.
To make Indian assets more attractive, we need better structures that facilitate capital inflows and outflows, simpler and lower taxes, deregulated sectors, and incentives for investment.
The AI revolution and global trade wars are increasing volatility worldwide. In such an environment, the ability to attract large pools of capital becomes crucial.
With global yields having collapsed (interest rates on bonds-government debt -- have fallen sharply across major economies) in the developed world, especially in the US, over the last 40 years, capital became incredibly cheap. Cheap capital (money that can be borrowed at very low interest rates) may now be ending -- which makes India's financial innovation and capital-market access even more important.
A key focus should also be on private markets (investments in unlisted companies or startups), which are expanding rapidly globally, alongside public markets (stock exchanges where listed companies trade).
Easier access for global capital to participate in India's private markets will be vital.
In short, the rupee's weakening is an opportunity for India to deepen reforms in capital markets and regulation. Fiscal and monetary policy matter, but the attractiveness of Indian assets matters most.
Could the rupee slide further beyond Rs 90, or do you see it stabilising soon? If yes, why? What level should we realistically expect by year-end?
Predicting currency markets is tough business! But we think the Rs 89-91 level is likely to be the range for the rupee into year-end.
How does a weaker rupee affect ordinary Indians -- for example, through fuel prices, overseas education, foreign travel, or imported goods?
A weaker rupee will make imports -- including fuel, foreign education, and travel -- costlier. However, an effective trade deal could help stabilise the currency.
In the long run, India's strong growth story and reforms to make assets globally attractive will determine the rupee's resilience.
What can the government and RBI do in the near term to arrest the rupee's decline without hurting growth? Do you see any signals from the forthcoming RBI monetary policy?
In the near term, an effective US-India trade deal and a credible fiscal stance will be the key to stabilising the rupee. We expect the RBI to stay vigilant against excessive volatility while letting the market determine fair value.
Even as the dollar remains weak against many other global currencies, it is strengthening against the Indian rupee. Why?
The rupee's performance is being driven by the lack of clarity around the US-India trade deal and by foreign portfolio outflows.
India remains a robust growth story and an emerging-market leader, but needs deeper structural reforms to boost the global attractiveness of its assets.
Ultimately, easier access and exit for global capital will be the single biggest factor driving the rupee's strength over the coming decade.