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Currency falls, remittances rise, economy grows
September 1, 2018, 3:00 pm

Since January, macroeconomic factors have piled pressure on the Indian rupee leading to it losing over 9 percent this calendar year and breaching the Rs70 per dollar mark for the first time in August. Surge in international oil prices, sharp resurgence of the US Dollar against emerging market currencies, the pull-back by foreign investors, widening trade deficits and rising global geo-political risks, from rising protectionism and ongoing trade wars, have impacted the Indian currency.

However, the rupee’s downward spiral has had a boosting effect on remittances from abroad, which is estimated to have increased by 25 percent from the same period a year earlier. According to the World Bank, foreign remittance to India crossed US$69 billion in 2017, making the country the largest recipient of remittances from abroad. In recent months, major emerging market currencies have lost considerably against the US dollar. Argentine peso has shed 82 percent so far in the year, making it the worst performer in the emerging market space, followed by Turkish lira, which has shed 77.61 percent so far in the year.

Plunge of the Turkish lira has had a psychological effect on other emerging market currencies, with the Argentinian peso suffering the most, the South African rand losing over 10 percent and banks in Europe with dealings with Turkey suffering. According to analysts, a resurgent dollar impacts countries with large current account deficits, high external debt repayments and substantial foreign currency government debt. The rise in dollar along with the protectionist trade policies that have fueled ongoing trade wars between the US and several other countries, most notably China, have had an indirect adverse effect on investments in the economies of emerging markets.

In India, the ebb in investment flows was seen in the withdrawal of over $8 billion by Foreign Institutional Investors (FII) in the three months to June. Additionally, India’s continued dependence on imported oil to fuel its growing economy, has been impacted by the increase in global oil prices that have soared to over $70 per barrel in August. It is estimated that every $10 rise in crude prices impacts India’s trade deficit by $9 billion or nearly 0.3 percent of GDP. The surge in oil prices in recent months led to the trade deficit widening to five-year high of $18.02 billion in July.

Higher trade deficits lead to widening of current account deficit, which is the difference between inflow and outflow of foreign exchange, on an annual basis. But despite the downward spiral of Indian rupee to historical lows and flaring current account deficits, the Reserve Bank of India has limited its intervention in support of the currency. With a forex reserve in excess of $400 billion, the RBI appears confident that the economy will weather the storm, and that once the international noise and dust settles the currency would recoup some of its losses in the days ahead. Long-term confidence in the Indian economy was further strengthened by data released last week by the country Central Statistics Office (CSO), which showed the Gross Domestic Product (GDP) grew 8.2 percent in the April-June period.

The surge in GDP growth was the highest level of economic growth recorded since the first-quarter of 2016, and entrenched India’s spot as the fastest growing major economy, and way ahead of China’s 6.7 percent growth. Amid reports that the government expects to trim the fiscal deficit to 3.3 percent of GDP this fiscal year, the economy is now expected to exceed the estimated 7.5 percent growth this fiscal year. India’s CSO also disclosed that manufacturing and consumer spending contributed significantly to the growth in GDP, with merchandise exports rising to 14.32 percent year-on-year in July.

The statement from the CSO is also an indication that several structural reforms initiated recently by the government, such as Goods and Services Tax (GST), are beginning to pay rich dividends. Economists say that although the recent fall in rupee could benefit Indian exports, the prevailing protectionism and slower global growth might continue to hinder exports this year. Moreover, the depreciation of the currency along with widening current account deficit is likely to increase borrowing costs for corporates. Analysists believe that the major support to the country’s growth needs to come from a sustainable recovery in private consumption and investment.

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