Emerging Market Currencies against the US Dollar

The Rupee has recently been trading close to its historical low of 68.8 against the US Dollar and many in the financial press have expressed concerns. Non-Resident Indians (NRIs) have been debating whether they should send money to India or buy assets in the country right now or wait longer so they could get more Rupees for their Dollars. Importers are hurting since they have to shell out more Rupees to buy Dollars. Although the Reserve Bank of India Governor Raghuram Rajan has expressed willingness to use Forex reserves to manage 'volatility' in the currency markets, where is the Rupee headed? Why is it falling? And do other emerging market currencies have it as bad too?

We decided to compare the Rupee's valuation to other major emerging market currencies and it appears that the Rupee's fall is not an isolated case and neither is it the worst performer. Almost all major emerging market currencies have fallen against the USD, and rather precipitously in the last year. The exception is the Chinese Yuan but China gets a bad rap for being a currency manipulator and Beijing has repeatedly warned investors around the world about not shorting the Renminbi. Below are some reasons why the Rupee and other emerging market currencies have been falling against the dollar.

1. The Chinese Yuan: Although not as drastically as other currencies, it too has certainly declined. This makes exports of other emerging markets less competitive and demand for their currencies falls thereby causing their devaluation.

2. Inflation: India has consistently had significantly higher inflation than the US. Although a simplistic explanation, this means that the Rupee loses its buying power at a faster rate than the dollar. Argentina has had very high inflation (an average of 21% for the last 4 years) and sure enough the Argentinian Peso has fallen the farthest compared to other currencies.

3. Holding pattern in the face of volatility: Exporters keep their earned dollars abroad, NRIs hold off on making money transfers, buying assets, and investors take a wait and see approach. All this increases the demand for the dollar and Rupee falls even further.

4. Strengthening of the Dollar: Relatively good growth in the US and weak growth in major currency countries (Europe, Japan, and to some extent UK), has strengthened the dollar.

5. Slowing Global/Indian growth: The slow global growth reduces capital inflows and the influx of foreign currency into India. The slow rate of policy and regulatory changes further discourages foreign direct investment. The Make in India campaign, paired with tangible policy changes should hopefully change that.

And there you have it! Hopefully this explanation somewhat demystifies the Rupee's fall and you can make an informed decision about your Dollar-Rupee transactions.

*Chart renders best on Desktop. We publish a modified version for phone.