Economy: On A New High

Indians are geting rich, and how. With the surprising, but steady, appreciation in the rupee, many of us can now purchase more cents for the same rupee. In dollar terms, with every fraction of appreciation in the rupee, billionaires are adding a couple more millions to their networth. A back-of-the-envelope calculation points to an addition of roughly $80 million for a 4 per cent rise in the currency.

Not only billionaires benefit from a rise in currency. Ordinary Indians, too, can now afford foreign tours and more students can aspire to study abroad. A rising rupee also means that Indians are increasingly paying fewer rupees for the same dollar. Imported inflation comes down as well, given that India is the biggest consumer of oil used in basic logistics.

Figures at the start of the year show the dollar hovering around Rs 67.95. Within four months, though, it lands at Rs 64.24 — an inch or so from Rs 64, a 5.4 per cent appreciation.

Not many expected this to happen, particularly after the demonetisation move, the biggest withdrawal of currency notes, announced in November 2016. The sheer magnitude of the shock saw the rupee plunging from Rs 66.8 to Rs 68.8. But those levels are now history, or so it seems.

A dynamic shift can be seen in India Inc.’s balance sheet. And, judging by the way the figures are shaping up, it is an improvement that stands on solid ground. The positive influences on the rupee lately have arisen from a strong current account, a weakening dollar and swelling foreign flows into the country of over $13 billion in the current calendar year.

Not surprisingly, it is the fund flows into the Indian economy that is at the root of the recovery. Foreign investors, who shied away from the Indian stock markets during demonetisation, are now returning, encouraged by the strong domestic policies of the government and the swift recovery post-demonetisation. Foreign investors poured a record $9 billion during March alone, driving the strong rupee appreciation.

Foreign inflows are expected to be strong as the Indian economy sheds the legacy of demonetisation and shoots towards the coveted 8 percentage-point economic growth. Strong capital flows drive more money into the Indian economy, pushing up demand for rupees in currency markets, which has a positive effect on the currency.

India’s economic growth is also driving the strength in the rupee, though not by much. The economic impact of demonetisation has not been much, and a slow recovery is on the cards.

But will the rise sustain? Experts reckon that the medium-term appreciation bias in the rupee does not signal a long-term change in the rupee. Indranil Pan, group economist with IDFC Bank, says, “The broad assessment is, we should not be seeing an appreciation bias from now on. The broad direction seems to be that of depreciation.”

To be sure, among the reasons for this stance is the higher domestic inflation as compared to the rest of the globe. “The inflation differential is the biggest reason,” says Pan. “India’s inflation continues to be higher than global inflation. Domestic demand is still not growing very significantly. We are still not sure how the overall corporate demand will move. The continuous flow of external dollars in the economy may not be a right assessment from a medium-term perspective,” he adds.

To be sure, the appreciating rupee does not help the competitiveness of Indian exports, which tend to become more expensive in terms of dollars as the rupee bulks up. However, for now, the Indian government is revisiting its stance on the rupee and, instead, focusing on increasing the competitiveness of the Indian economy.

In a recent policy statement in Tokyo, Commerce Minister Nirmala Sitharaman brushed aside the notion, “When the rupee is high, exports tend to suffer is a feeling that has been well established in economic parlance.”

The Indian economy is making up for this through the strength of the domestic economy. “But I think we are talking of an economy, which, in the last few years, has depended not just on exports, but we have a blend of exports and domestic industry; unlike China, we have not really focused only on exports and export-driven growth,” she has been noted as saying in a recent media interview in Tokyo.

This signals that the government is not perturbed by the rising rupee, but is calculating on the strong international position of India in the world economy against other economies.

Still, even if it is for a brief moment, the Indian rupee has been one of the best performing currencies when many global emerging market currencies have been taking a beating.

In fact, the hardening of interest rates in the US economy, which is expected to drive more fund flows from emerging markets into the US, has not impacted the rupee in a negative way. Under the normal circumstances, even a mere mention of a rate hike in the US would send the rupee tumbling. In June 2013, when former US Fed Chairman Ben Bernanke announced a possible roadmap to end the bond-buying programme in the US, world markets quivered and tumbled. The Indian rupee nosedived to nearly Rs 69 to the dollar as global currencies fell due to a strengthening dollar. But now, even with a few US Fed rate hikes behind us, the rupee seems to have found new strength and continues to shine. The US Fed announced a 25 basis point rate hike on 25 March; the Indian rupee has since gained Re 1 against the dollar.

On the other hand, the current-account deficit is expected to be range bound, at around 1-1.5 per cent of GDP in FY18. This is expected to keep the balance of payments in India’s favour and pile on less pressure on the rupee to depreciate. Normally, when imports rise and exports fall, the current account deficit takes a knock, putting pressure on the domestic balance of payments and interest rates.

The demonetisation has, to some extent, increased liquidity with banks, indirectly helping the rupee. Domestic interest rates are expected to be soft, providing a soft cushion for a stronger rupee. Inflation has been persistently lower over the last few months and is now hovering at sub-5 levels.

THE GOOD, AND THE NOT-SOGOOD ASPECTS OF A STRONG CURRENCY

* Imported goods and foreign currency expenses like education to get cheaper
* Forex loans in corporate balance sheets to see a reduction
* Lower crude oil imports will result in lower wholesale inflation
* Remittances from overseas will get hit due to lower converted rupee prices
* Export-oriented sectors may get hurt and see lower realisations

Globally, however, there has been a mixed trend, with some currencies appreciating against the dollar, while others have depreciated. India, Philippines, Malaysia, South Africa and Turkey are some of the countries seeing an increase in the value of their currencies; others like Russia and Brazil are seeing a fall.

Global currency dynamics have been shifting lately towards countries with better growth prospects. Fast-growing countries like China have been cooling off, which puts the spotlight on economies like India to lead global growth. This, in turn, favours currencies like the Indian one.

Still, it is too early to know whether the rupee will continue to appreciate. For now, much of the appreciation has been slow and steady, and given that the appreciation has been strong lately, there are chances that the rupee could find its bearings at current levels of Rs 64-65.

In case the rupee overshoots the sub-Rs 64 levels, we could see RBI intervention. “If I am not mistaken, the current value of the rupee in the range of Rs 64-65 is reasonable, and that is where possibly the RBI would want to hold it,” points out Pan. “If there is some pressure on the lower zone, that is, sub-Rs 64 levels, then the RBI could intervene in the forex market,” he adds.

In the long run, the rupee may not be poised for further upside. Some of the factors such as low interest rates, a stable fiscal deficit, and a low current-account deficit can do wonders for the rupee, but it’s still early days.

But for the time being, the good news is that we are seeing many more dollar billionaires and relatively less expensive foreign tours.