Indian Rupee Outperforms Peers Through Covid-19 Sell-Off
The Indian rupee has outperformed most major emerging economy currencies over the period of time when global markets have sold off due to fears surrounding the spread of Covid-19.
The Indian currency’s outperformance is despite large outflows from the local debt and equity markets. The performance of the rupee is also in stark contrast to the 2013 period when emerging market currencies plummeted due to fears of the US Federal Reserve tapering its balancesheet, wrote JPMorgan's Chief India Economist Sajjid Chinoy in a note dated April 3.
Foreign investors pulled out $14 billion from the country last month compared to $7.2 billion back in 2013. Even as a percentage of GDP, this is the single largest monthly outflow on record, Chinoy said.
Stronger External Fundamentals
Despite large outflows, the rupee has fared better than emerging market peers. One reason for this is improved external metrics. “On several external sector metrics, the Indian Rupee is much better placed in 2020 than in 2013,” wrote Chinoy.
Some of these factors include:
- India’s gross external financing requirement as a share of its forex reserves is at decade low and is almost half the level during the 2013 taper tantrum.
- External debt has been trending downwards in recent years and stands at 19.4 percent of GDP, which is significantly lower than other emerging markets.
- Net international liabilities stand at 15.7 percent of GDP as of 2019, although it was lower back in 2010 at 11.3 percent of GDP. Yet, compared to emerging market peers, India continues to stand out and has a relatively favourable international investment position.
Moreover, lower crude oil prices could mean that India reports a rare current account surplus in FY21.
With crude prices expected to be in the $29-35/barrel range (JPMorgan forecast) over the next one year, and with the domestic growth slowdown (and weak import growth) expected to offset the weakness in exports this fiscal year, we forecast a current account surplus of about $20 billion (0.7 percent of GDP) for FY21 (year ending March 2021) versus a current account deficit of about 1 percent in FY20.Sajjid Chinoy, Chief India Economist, JPMorgan
Heavy RBI Intervention
Another factor in supporting the rupee have been the RBI’s direct and indirect interventions in the foreign exchange market.
The central bank’s direct intervention has come via the offer of long term forex swaps, providing dollars to the markets. Indirect intervention has come via selling in the spot markets.
Why might the RBI be intervening so heavily to prevent depreciation?
Chinoy says that one concern could be the spurt in external commercial borrowings by Indian corporates over the last few years. It is possible that a fraction of these recent commercial borrowings remain unhedged, prompting the RBI to step in and stem possible losses for those who have borrowed overseas.
The central bank may have also been trying to prevent a downward spiral.
One of the oldest rules in financial markets is “fear begets more fear.” With March witnessing the highest portfolio outflows ever, the RBI may have been concerned that sharp rupee depreciation would precipitate more outflows, as was the case in 2013. Intervention was therefore likely aimed at slowing the pace of depreciation to break a self-fulfilling cycle.Sajjid Chinoy, Chief India Economist, JPMorgan
Beware Of Over-Valuation
While the relative stability of the rupee is encouraging, the central bank should be watchful of the Indian currency becoming even more overvalued than it is now.
India’s trade-weighted real effective exchange rate has appreciated 7 percent over the past year and is 16 percent stronger than six years ago, the report pointed out.
“A gradual and calibrated depreciation of the Rupee would act as a safety valve—by reducing the risks of speculative pressures building against the currency—ease monetary conditions, and ensure that the economy does not lose competitiveness,” Chinoy said.