EDITORIAL DISCUSSION 29th June THE HINDU unacademy
The deepening disconnect Sinking rupee Target incomes, not prices As the dollar puts emerging market currencies under strain, the RBI needs to have a plan. S. UBHODEEP
EDITORIAL DISCUSSION 29th June THE HINDU unacademy
Our currency weakened - against the U.S. dollar, an all-time low. The rupee, which has lost almost 8% in value since January 1, is the worst-performing currency in Asia this year. Emerging market currencies as a group have witnessed a sharp correction in their value against the dollar this year. The MSCI Emerging Markets currency index, for instance, is down about 6% since the beginning of April. The dollar index, which gauges the value of the dollar against a host of major global currencies, is up about 7.5% since February UBHODEEP
Reasons: O The rise in international crude oil prices is one of the reasons behind the rupee's decline as importers have had to shell out more dollars to fund their purchases The rise in global trade tensions amidst the ongoing trade war could be another factor behind the rout in emerging market currencies, but its impact on the rupee remains unclear as of now OThe most important reason behind the fall in the rupee and other emerging market currencies is the tightening of U.S. monetary policy. Most of the foreign fund outflow this year has come out of the bond market, which explains the steep fall in Indian bond prices. UBHODEEP
Impacts: India's current account deficit, which jumped to 1.9% of GDP in the fourth quarter of 2017-18 from just 0.6% a year earlier, is now expected to widen to 2.5% in FY 2019. It is hard to determine if the worst is over yet for emerging market currencies. But the fact that the American central bank expects to raise interest rates further this year suggests that more pain could be in store. The government, as well as the Reserve Bank of India, which recently raised domestic interest rates in response to rising external economic risks, may need to think out of the box to avoid a crisis similar to the taper tantrum of 2013. UBHODEEP
he deepening disconnect Rethinking the referendum S. UBHODEEP
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