The recent slide of the Indian Rupee past the 90-per-dollar mark has understandably raised concerns. However, a new report from SBI Research Ecowrap suggests this rapid depreciation isn’t necessarily indicative of a fundamentally weak currency. Instead, it’s a complex interplay of global economic pressures, shifts in investor sentiment, and a measured approach from the Reserve Bank of India (RBI). The rupee’s fall, happening at a pace not seen in years, warrants a closer look at the underlying factors.
Understanding the Rupee’s Recent Depreciation
The Indian rupee has experienced a significant downturn, falling from Rs 85 to Rs 90 against the US dollar in less than a year. This speed of decline is noteworthy; previously, similar five-rupee movements took considerably longer – ranging from 581 to 1,815 days. SBI Research highlights this as the second-fastest depreciation since the 2013 “Taper Tantrum,” a period of market volatility triggered by the US Federal Reserve signaling a reduction in its quantitative easing program.
Since April 2nd, 2024, when the United States announced substantial tariff increases, the rupee has depreciated by approximately 5.5% against the dollar. This makes it the most depreciated currency among major economies during this period, despite occasional gains fueled by optimistic trade outlooks. It’s crucial to understand that this depreciation is happening within a broader context of global economic shifts.
The Impact of US Tariffs
A primary driver of the rupee’s decline is the high tariff slab imposed on India by the US – a hefty 50%. This is significantly higher than the tariffs levied on countries like China (30%), Vietnam (20%), Indonesia (19%), and Japan (15%). These tariffs directly impact India’s export competitiveness and contribute to the downward pressure on the Indian Rupee. The trade war escalation has created a challenging environment for emerging market currencies.
Rupee Volatility and the Real Effective Exchange Rate (REER)
Despite being the most depreciated major currency recently, the SBI report emphasizes that the Indian Rupee isn’t the most volatile. Volatility measures the degree of price fluctuation over a given period. The rupee’s coefficient of variation, a statistical measure of dispersion, stands at a relatively low 1.7% since April, indicating a degree of stability compared to other currencies facing similar pressures.
A more insightful metric for assessing the rupee’s value is the Real Effective Exchange Rate (REER). The REER considers a weighted average of a country’s currency against a basket of its major trading partners, accounting for inflation differentials.
REER Trends and Undervaluation
Analyzing a 40-currency basket with a base of 2015-16, the REER index remained above 100 until May 2024. However, the onset of the trade war pushed it below this level, as the rupee lost ground relative to other emerging market currencies. The lowest REER level in recent times was recorded in April 2023 at 98.98.
Since then, the rupee has declined nearly 10%, and the REER reached a seven-year low of 97.40 in September 2024 – a level not seen since November 2018 (99.60). Recent data from the RBI, as of October 2024, indicates that the rupee is undervalued for the third consecutive month. This suggests a softer currency and, importantly, lower inflation, which can be beneficial for the Indian economy in the long run. Historically, India’s REER typically fluctuates between 102-105, with an average of 103.47 between December 2018 and July 2024.
RBI Intervention and Future Outlook
The SBI report acknowledges the limited intervention by the Reserve Bank of India (RBI) in stemming the rupee’s decline. While the RBI actively manages the currency, it has adopted a relatively hands-off approach, likely prioritizing the maintenance of foreign exchange reserves and allowing market forces to play a larger role. This strategy differs from more aggressive interventions seen in the past.
The current situation highlights the vulnerability of emerging market currencies to external shocks, particularly those stemming from major global economies like the United States. The ongoing trade tensions and potential for further tariff hikes remain key risks for the Indian Rupee. However, the report’s emphasis on the currency’s relative stability and undervaluation suggests that the recent depreciation may not be a sign of long-term weakness.
Furthermore, understanding foreign exchange reserves and their strategic deployment is crucial for assessing the RBI’s future policy decisions. The level of these reserves provides a buffer against further volatility.
In conclusion, the recent depreciation of the Indian rupee is a multifaceted issue driven by external factors, particularly US tariffs, and influenced by investor behavior and a measured RBI response. While the pace of decline is concerning, the SBI report provides a nuanced perspective, suggesting that the rupee is not inherently weak but rather responding to a challenging global economic landscape. Monitoring the REER, RBI intervention, and the evolving trade war situation will be crucial for understanding the future trajectory of the Indian rupee.
For further insights into the Indian economy and financial markets, explore the latest reports from the Reserve Bank of India and other leading financial institutions.
