StatsGuru-27-May-2013

Making sense of the rupee's depreciation

Has the rupee's behaviour in the recent past been predictable? As Table 1 shows, it has declined several percentage points against the dollar in the past month. Of course, in general the dollar has strengthened of late. But the rupee's depreciation seems stronger than would otherwise have been expected even under those conditions, given that India is a big importer of resources - but the prices of those have been falling. As Table 2 shows, there has been a significant drop in the price of crude oil in the year to date (YTD). And, the YTD fall in gold prices has been even more marked, by almost 20 per cent (Table 3). Such conditions usually benefit the rupee, and permit it to strengthen but, instead, it has lost almost as much as the Japanese yen, which has weakened following that country's determination to launch an inflationary expansion - shown most dramatically in its nearly 18 per cent fall YTD against the dollar, in Table 4. The rupee has declined against the dollar in spite of the further fact that foreign flows have remained robust. Foreign direct investment, as shown in Table 5, has not collapsed; and, meanwhile, foreign institutional investment in the equity markets, shown in Table 6, has been supportive in the very recent past. On the other hand, as Table 7 shows, India is an outlier in terms of the size of its current account deficit. This means its currency should ideally be falling even faster, to make imports more expensive and exports cheaper for the rest of the world - but that isn't happening. The last word should probably belong to the trade-weighted real-exchange rate index from the Reserve Bank of India, shown in Table 8. It suggests the rupee is still significantly overvalued but less so than earlier this year. (Click here for table)