The Indian rupee has been grappling with multiple macroeconomic crises simultaneously, and yet it isn’t Asia’s worst-performing currency.
The domestic currency briefly hit the 80-per-dollar barrier yesterday (July 14) against the US dollar, marking another fresh low this year. Today, it was trading at 79.89 a dollar. It may only be a matter of time before it crosses the psychological threshold more convincingly. So far in 2022, India’s rupee has lost nearly 7.5%.
The brutal rout has clearly set off alarm bells at the Reserve Bank of India (RBI). Supply chain disruptions due to the Ukraine-Russia war, fears of a global recession, soaring inflation, and current account imbalance have pushed foreign investors into dumping the rupee for the dollar.
Red-hot inflation in the US has increased the possibility of a 100-basis-point hike in policy rates by the Federal Reserve, leading to risk aversion in the markets. This has added to the developing markets’ woes.
While the euro and yen, two of the world’s most traded currencies, are at multi-decade lows, the spillover in emerging market economies is imminent. Some Asian currencies are generally more vulnerable than others.
“At the end, the currency is all about relative value—who is wearing the cleanest dirty shirt in the room and right now dollar looks to be outshining all other pairs, be it rates differential, growth or safe-haven demand,” said Vikas Bajaj, head of currency derivatives at Kotak Securities.
This year, the South Korean won has emerged to be the worst performer, falling by almost 10% against the US dollar followed by the Thai baht (9.38%) and the Philippines’ peso (9.29%).
“If you look at the Asia Pacific in general, currencies that have been the weakest are those where policy rates have not closed the gap with inflation,” Robert Carnell, head of research for Asia Pacific at ING told Reuters.
In India, the RBI has been attempting to curb volatility by deploying dollars from its sizable coffers. However, its reserves are depleting fast—to be precise, by 1 lakh crore rupees ($12 billion) since February 2022.
Experts believe that the recent measures the RBI announced to stabilise the rupee may not yield benefits immediately as long as the external environment remains hostile.