The Indian Rupee (INR) continued its downward trend, reaching a 17-month low against the US Dollar (USD) on Monday 9th March, and a lifetime low of 20.34 against the UAE Dirham the following day. Is this just a temporary occurrence or is this part of a wider pattern across the currency market?
Oil Prices Fall
Following a dramatic crash in oil prices on 9th March, the Indian stock market followed suit. Technically, this shouldn’t have happened: India relies heavily on imported crude oil, so a drop in price should have been good for the market. When a similar event happened back in 2015, the Rupee was only marginally knocked down, but with the help of a stable government and a diverse and expanding financial sector, India managed to make gains and the currency strengthened. Yet, when the same thing happened this year, India was unable to reap the benefits.
$65 crore ($650,000,000) was wiped from domestic stocks overnight, a strong reflection of the air of uncertainty hanging over not only oil markets but the economy as a whole. Investors are worried that something big is just around the corner and that uncertainty has been mirrored in the value of the Indian Rupee.
That ‘something big’ may not be particularly mysterious, however, as it is already out in the open. Coronavirus (Covid-19) has left many experts predicting economic effects akin to the 2008 financial crisis caused by the economic slowdown associated with the virus. The previously mentioned drop in oil prices was part of a wider response to the prediction that people will travel less with the progression of Coronavirus.
With European countries such as Italy facing full quarantine, it isn’t out of the question to suggest that the same may happen in other countries across the globe. With less movement comes less tourism, less business travel and, subsequently, lower use of fuel. The knock-on effect can be felt in almost every business sector.
However, after major drops in the market, investors hope that governments will step in to prevent economic damage as bad as the 2008 financial crisis. The United States Federal Reserve issued a statement back in February saying that it will “act as appropriate to support the economy” which worked to soothe some of the panic seen in the US market. Those trading Indian Rupee and hoping for a bounceback would be best served if The Reserve Bank of India (RBI) showed that it was willing to step in if needed, but have so far been underwhelmed by half-hearted responses, despite their standard policy of aiming to stabilize prices.
In contrast, in the United States, the dollar saw record highs against the Rupee, owed in part to their Government’s assurances, but also talk of plans to reduce payroll tax and introduction of paid leave for those affected by Coronavirus.
Geopolitical Effects Beyond the Rupee
As much as we all like to see ourselves as self-sufficient, the truth is that when it comes to currency, every move can cause major ripples across the entire global market. In strengthening his own country’s currency with protectionist policies, Donald Trump has inadvertently (or perhaps deliberately) reduced the value of others. Higher US Federal Interest Rates have the effect of pulling dollars back to their home country, which in turn means there are less to go around globally.
Meanwhile, Brexit in the UK has caused uncertainty around the value of the Pound which has caused widespread fluctuations in currency markets. Prior to December 2019, there was a conflicting story about the future of the UK’s relationship to the European Union almost every day and the markets responded accordingly. A decisive general election win for the pro-Brexit Conservative Party brought with it much-needed certainty and raised the Pound to highs unseen in the years following the referendum. Unfortunately, as with the Dollar, the strengthening of one currency led to the weakening of another, in this case, the Indian Rupee took the hit.
It has been predicted by the UN’s Conference on Trade and Development Agency (UNCTAD) that Coronavirus could wipe between 1 and 2 trillion USD from the global economy and the agency specifically mentioned India as one of the worst affected countries economically. Expected to see a trade impact of $348 million, India sits in the top 15 most affected countries.
However, Richard Kozul-Wright of UNCTAD believes that countries should work together to form broad policies on economic intervention. Rather than clinging to the belief that the market will self-correct, he says that much of the economic damage associated with Coronavirus can be avoided.
Kozul-Wright called for well-thought-out responses in terms of both policy and institutional reforms to prevent, in his terms, “a localized health scare in a food market in Central China from turning into a global economic meltdown.” This demonstrates that the value of the Rupee hinges on more than India’s own policies, and is part of a much wider, geopolitical picture.