Dinesh Kamath's Editorial 'Prevent the rupee value from falling' that was published in Newsband

Prevent the rupee value from falling

There is increasing demand for the U.S. dollar. Emerging market economies’ currencies resume their prolonged slide against the U.S. dollar. The Indian rupee weakened past the 71 mark for the first time ever. This makes the rupee the worst-performing currency in Asia. Turkish lira, the Argentine peso and the South African rand, have suffered much larger losses.

The common factor underlying the wider carnage among emerging market currencies is the increasing demand for the dollar across the globe. Investors who earlier put their money in emerging markets have recently preferred American assets, which now yield higher returns. Emerging market countries, which earlier benefited from the easing of monetary conditions in the West, are now feeling the pain of a return to monetary policy normalcy.

The chief among the troubles of emerging market economies is higher domestic inflation when compared to the economies in the West. It is only natural, then, that their currencies will slide in value over time against the dollar and other major Western currencies. There should be a drastic change in emerging market monetary policy vis-à-vis the West

Emerging market currencies are under pressure and this has weighed on the rupee too. The dollar index continues to remain higher on expectations of aggressive interest rate hike by the Federal Reserve. The RBI had not been intervening aggressively to defend the rupee, which has depreciated more than 9% against the dollar in 2018. Comments from officials from the government and quasi-government agencies give the impression that they support this fall in the rupee’s value in the interests of competitiveness

The depreciation has implications for exporters, importers and borrowers in foreign exchange. This momentum could dissipate if not reverse suddenly and the way to ‘play’ the rupee market in the near term is through continuous monitoring of this momentum bias.

The fall also weighed on the equity markets. Trend appears weak for rupee. Sizeable RBI intervention can help avoid panic in market. Month-end dollar demand from importers and the recent rise in oil prices have spurred the trend. The trend forward for the rupee, which has been spiraling downward recently, looks weak, according to currency traders. Dealers also urged higher intervention by the Reserve Bank of India (RBI) to help avoid panic-triggered trades.

The rupee needs more support from the RBI or, some big global positive news. There is a lot of panic buying amongst importers and equity investors as well, who want to hedge the currency risk now. Everyone is a buyer of dollars in the current market. The rupee, which has depreciated is the worst-performing Asian currency so far.

The fall in the currency also weighed on the stock market. Most of the index constituents from the lending space such as IndusInd Bank, Yes Bank, Axis Bank, Kotak Bank, HDFC and HDFC Bank lost ground in an overall subdued trading session.