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India feels the heat of a currency crisis

Finance Blogger: Shaun Richards Shaun Richards

The last few days have seen India sink into a full-blown currency crisis as the value of the rupee has plummeted to a succession of all-time lows versus the US dollar. As I type, this it has fallen by more than 3% today alone and is priced at 68 rupees to each single dollar. If we look back we see that the decline of the rupee began at the start of May when it was at 54 to the dollar. So it has declined by 26% in just under four months. There has been a further acceleration since late July where the fall in one month has exceeded that of the previous three months.

This crisis has not been missed by cricket fans who observed last week that the rupee had brought up a century against the UK pound sterling. In fact it has now pressed on to pass 106.

What has caused this? The Reserve Bank of India

Back on February 27, I pointed out on this blog that I thought that the Reserve Bank of India (RBI) was taking a dangerous gamble with India's economic future:

“If we add economic growth to the inflation rate we see that at somewhere between 16 and 17% a central bank would normally be pressing the brake and not the accelerator and some would be stamping on the brakes hard!

“Secondly if you add in the promises of further action the RBI has taken quite a gamble here but if it fails it will be the Indian population who will feel the pain.”

It embarked on monetary stimulus when in fact if the Indian economy was a nuclear reactor it would be considered to be running dangerously hot. At the time it promised that the inflationary outlook for India was good. However we see from the latest data that this has not turned out to be the case. From India Statistics:

“Provisional annual inflation rate based on all India general CPI (Combined) for July 2013 on point to point basis (July 2013 over July 2012) is 9.64%.”

If we look into the detail of the numbers I note that prices are rising rapidly for at least some of what are regarded as staple products in India:

“The index for ‘Food Articles’ group rose by 3.4 percent to 237.7 (provisional) from 229.8 (provisional) for the previous month.”

According to the same update the price of the humble onion had risen by 31% in the previous month and 145% in the previous year. Indeed since then Bloomberg has reported this:

“Onion prices in Delhi surged to 60 rupees (93 cents) a kilogram (2.2 pounds) from 16 rupees three months ago.”

US monetary policy

This has impacted on most countries which are classified as emerging markets, of which India is one. When the US Federal Reserve expanded its monetary operations, some of the funds created flowed across international borders as they looked for what they perceived to be better investment opportunities. However, as the US economy showed signs of improving in early 2013, speculation began as to when the stimulus might be reduced, and this was reinforced on May 22 by the fact that the Chairman of the US Federal Reserve Bank referred to this in his testimony to the US Congress. Even though this was only talk or what has been labelled “open mouth operations” about something which might happen in the future, it did impact on world markets.

US Treasury Bonds (government bonds) fell in price and rose in yield, attracting funds back to the United States and away from the emerging markets, in what for places like India has become something of a perfect storm. Again I would like to reinforce the fact that these large market moves have anticipated a change of official policy quite some time ahead of events and it has yet to actually take place.

Back to India

The currency crisis has affected all her financial markets. For example the "Nifty Fifty," which measures the performance of the Indian stock market, fell by over 3% yesterday, taking it down to 5287. This means that it is down 9% so far in 2013 and back to the levels of this time last year. Also the price of Indian government bonds has fallen, causing yields to rise such that the benchmark ten-year yield is now 9%.

Also, just when India could particularly do without it, the oil price is rising due to fears about Syria and possible outside military intervention. The price of a barrel of Brent Crude has reached US$116, which of course is added to by the way in which the rupee has fallen.


What has happened in India comes right back to the door of measures by central banks, including India's own as I have explained above. In response to the latest crisis the RBI has undertaken both contractionary and stimulative policies as it struggles to avoid the consequences of its ill-fated move in February. Indeed India's political class have much to rue as they told India's gold-hungry investors that it would be bad for them when in fact it has helped to hedge the rupee's fall.

I fear that those worst hit will be the poor and defenceless.

Tags: currency depreciation , exchange rates , India , monetary policy , Reserve Bank of India , rupee
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