The pandemic brought the global economy to its knees, as the world went into lockdown which stopped all the activity, disrupted supply chains and causing a surge in unemployment. The economic volatility also sent many major currencies into a tailspin. While already-weak economies have been hit hardest by inflation, many medium and high-income countries have also seen their currencies depreciate over the past 18 months amid protracted lockdowns, border closures and supply chain constraints. We take a look at which major currencies have depreciated the most in 2021 when measured against the US dollar. Turkish Lira is the worst EM currency which has been affected because of its weak economy and as the enter FATF Grey List which put a ban on their exports.
INDIAN RUPEE: Indian Rupee was largely behaving well since the start of pandemic, as there was so much liquidity been pumped by US Fed which brought the interest rate to it historic low, which flow to risky Asset and Emerging Market like India and India being a big EM market got a lot of dollars flow into the country and Rupee even went to 72.5 per dollar from there on RBI constantly bought Dollar and built there forex kitty. Since the start of September this foreign capital has again started moving back to developed world as inflation has started to inch up and market has started to anticipate that Fed will have to wind down QE, and raise interest rate sooner than later which made the rupee vulnerable and has started to depreciate, from mid of November this momentum has gain pace and is touching almost 76 mark which is near to its all-time high.
Major Factors Affecting Indian Rupee:
Dollar Index: The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of the majority of the U.S.’s most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies. Dollar Index which was at 89 at the start of year has moved to 96.5 which means that money is moving back to US and Investor are turning cautious and want to keep money in dollar form.
Inflation: Due to fiscal and monetary stimulus growth has picked up all over the world, but restriction all over the world due to covid led to supply chain disruption, metals prices have shoot up to new high, freight prices has increase 5x from last year, crude has almost reach multi year high, all this factor led to decade high inflation in US. November month Inflation is the highest Inflation US has seen in last 50 years. Recently US Fed has removed the word Transitory and now feels this inflation is structural in nature and they need to quickly wind down quantitative Easing and hike Interest rate. Hot Money that came to India in the form of ETF are now going back to developed world which is putting pressure on Indian and Emerging Market Currency
Hawkish Federal Reserve: This sudden selling in Rupee is more to do with because of recent Hawkish stance of Federal Reserve and accepting the mistake that this inflation is not transitory which is turned the investor mood from Risk on to Risk off trade.
Trade Deficit: India’s merchandise exports in November 2021 was $29.88B, an increase of 26.49% over November 2020, the trade deficit in November 2021 was $23.27B, while it was121.98B $during April-November 2021. This Huge Deficit is also putting pressure on India Rupee.
Capital Flow: In this FY FII has sold around ₹ 1.27 lakhs crore and in October, November and mid-December they have sold more than $ 11 billion of equity which is one big reason for the fall in Rupee. Rising Crude also make crude exporting country more attractive in terms of investment.So money is shifting from India to Russia and Saudi.
OUTLOOK:
In Near Term we feel Rupee is quiet vulnerable to these factors and it breaks all time High of 77.01 then it may even touch 80, Inflation is the biggest factors that investor should look at if it flatten out at this level then fed can soften its stance and dollar index can reverse or sustain at this level. For long term India’s macro data are still solid and RBI has enough ammunition to main market balance. India’s Forex reserve are roughly $630 Billion which is more than 14 month import bill. Crude has also tapper off from the high which is also positive for rupee.
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