#RajanEffect: Why the rupee crashing to 68 against $ is not a shocker this time

Rajesh Pandathil and Kishor Kadam The rupee is back at 68 against the dollar and surprisingly nobody seems to be that worried. Last time, the currency hit 68 under the United Progressive Alliance regime, it had become a political hot potato.

UPA Government and the Rupee seem to be in a competition with each other on who will tumble down more. http://t.co/Rl8RMMJ9kZ

— Narendra Modi (@narendramodi) July 24, 2013

The rupee then was reacting to US Federal Reserve chairman Ben Bernanke’s comments hinting at possible tapering of the bond buying or money printing or easy money policies. And the rupee was not the only one to fall. All emerging market currencies fell as foreign investors hurried to pull out their money from riskier assets and flocked back to the US. [caption id=“attachment_2575436” align=“alignleft” width=“380”]  Raghuram Rajan, RBI Governor. PTI[/caption] The fall in the rupee and stock markets rattled the Manmohan Singh government especially since the elections were to be held in about nine months. The BJP was quick to cash in on the decline. “The country is disappointed today because the government is neither concerned about the economy nor the falling rupee. It is only worried about saving its chair,” said Narendra Modi, then Gujarat chief minister and a strong contender to the BJP’s prime minister candidate. And then Raghuram Rajan happened. As soon as Rajan took over as the governor of the Reserve Bank of India on 4 September 2013, he announced a slew of steps to improve the macro-economy. If the rupee hitting 68 is not worrying anybody now as much as in 2013, the credit definitely goes to Rajan. The rupee’s downward spiral this time is mostly due to the fears of Chinese slowdown and falling crude oil prices which point to a global economic slowdown. However, experts are really not worried this time round. “I think the RBI would generally be comfortable with the way the currency is behaving,” Rahul Bajoria, regional economist with Barclays in Singapore, was quoted as saying in a Reuters report. He expects the central bank to let the rupee depreciate in a controlled manner, especially if the dollar continues to strengthen. Here are three charts that explain why Rajan should get the credit for improving the macro fundamentals of the economy: Current account deficit: The biggest problem in 2013-14, when the rupee hit the record lows against the dollar, was the current account deficit. In the first quarter of that year the deficit stood at $21.8 billion or 4.8 percent of GDP. Current account goes into deficit when a country imports more than it exports. And 4.8 percent is a scary figure. This had prompted Chidambaram to take steps to control gold imports, a key reason behind the bulging deficit. Rajan also announced steps to shore up dollar inflows. The falling crude prices came as a major boost for the RBI. The prices which stand at below $28 a barrel now (75 percent from September 2013) has cut the country’s import bill significantly. A look at the graphic below shows that clearly India is in a better shape than earlier though gold import is rearing its ugly head again. In July-September 2015, the deficit stood at $8.2 billion or just 1.6 percent of GDP. Inflation: Rajan, whose tenure ends next September, will sure go down the history as the inflation warrior. When he took over the reins at the RBI, the retail inflation was at nearly 10 percent. This has now nearly halved to 5.6 percent. Under his governorship, the RBI took up inflation targetting as its mandate. He egged on the government to take steps to bring down inflation and take fiscally prudential steps. Here too the fall in crude oil prices has helped him. However, with inflation under control, now the central bank is in better position to support the rupee. Forex reserves: At $349 billion, this too is a big relief for the RBI. After Rajan took over as the RBI governor, he introduced a fixed-rate swap for dollar-denominated deposits for NRIs at subsidised rates aimed at attracting dollars. Within about 6 weeks, the reserves hit a 100-day high of $282.951 billion, as the special swap window attracted $8 billion. The reserves have risen 27 percent from September 2013 levels of $274.8 billion, when the import cover stood at just eight months. Now we have enough reserves to pay for more than 10 months of imports. Apart from these, there are exports which have been falling for the last 13 months. The declining rupee acts as support for exporters as it will boost their receivables. The rupee’s fall is expected to continue because, as Care Ratings notes, it is still somewhere in the middle of countries witnessing deprecation. “We do think that in the very short term the rate could touch 69/$ but the rupee will revert to $ 66/% when this sentiment eases. A range of Rs 66-67/$ could be pragmatic as every episode of deprecation across the globe leads to a new range,” analyst Mradul Mishra said in the note.