By Sandip Sen
On 20 April this year, the Indian Rupee breached the Rs 66 mark to a dollar for the first time in 18 months. Crude oil prices had been rising for the past few months resulting in a higher crude import bill and mounting current account deficit. India’s central bank intervened, but the pressure on the Rupee did not ease. By 8 May, the Rupee breached the Rs 67 mark and a week later it was quoted at Rs 68.06 to a dollar. Over the last three months, the RBI has reportedly sold over $30 billion to maintain the value of the Rupee and has arrested the slide, but only after the Rupee dipped briefly to Rs 69.02 to a dollar on 19 July. In the three-month period between 19 April to 19 July, the Rupee had slipped by 4.9%, raising speculation about another Rupee slump. So, it is worth revisiting the August 2013 slump and check if the conditions which sparked a near 25% slide in the second quarter of 2013 are still valid.
The unprecedented August 2013 Rupee slump
On 28 May 2013, the Rupee was quoted at Rs 55.97 for 1 USD. Three months later on 28 August, the Rupee had plummeted by 23% to Rs 68.83 to a dollar. The unprecedented Rupee slump heralded the beginning of the end of the UPA-II. The UPA government sprung into damage control mode and appointed Raghuram Rajan as the RBI Governor who took over the charge from Duvvuri Subbarao on 5 September. Rajan was already an advisor to Prime Minister Manmohan Singh long before the Rupee slide began. That made it easy for the firefighting to begin early, and arrest the slide of the Rupee before it slid past Rs 70. But, though the slide in the Rupee was arrested, the slide in the popularity of the UPA did not.
The Rupee gained back some ground with several counter measures taken by the UPA. With the change of Government, the sentiment improved and the Rupee rose further to move to Rs 59 per dollar for a month or two. But the fundamentals of the Indian economy were weak and soon it slipped again. Over the next three years, it has come to the same place where it was five years ago. The big question is wether the Rupee will slide past Rs 70/- this time. And if it does, is it due to speculation or weak fundamentals?
While the Government is trying to check the Rupee slide, the speculators will hope that the Rupee slips past Rs 70/- . Still, the difference between 2013 and 2018 is easily evident. While the Rupee had slumped by nearly 25% in the quarter before August 2013, it has slipped by a mere 5% in the quarter preceding August 2018.
Current account deficit and foreign exchange inflows
Let us compare the fundamentals of 2013 and 2018 and see why and how the Rupee slid now and then. One of the reasons of the Rupee slide of 2013 was the sudden slowing down of foreign exchange inflows and the sharp rise of current account deficits. In the year ending March 2012, the foreign exchange inflows through the FIPB route was $34.83 billion and the total FDI inflows were $46.556 billion. In the year ending March 2013, the foreign exchange flowing in through the FIPB route had slumped by a third to $21.82 billion while the total FDI had gone down by a quarter to $34.29 billion.
Since over 90% of the foreign exchange has been coming through the automatic route, Finance Minister Arun Jaitley abolished the FIPB route in May 2017. The total FDI inflows were marginally higher at $61 billion in the year ended March 2018 as against $60.2 billion in the year 2016-17. This was lower than market expectations and one of the reasons why the Rupee fell by nearly 5% during the summer of 2018.
In the year ended March 2004, India had a current account surplus. The current account deficit CAD started growing rapidly from the year 2007-08. The CAD grew from $78.2 billion in 2011-12 to $87.8 billion in the year ended March 2013. Though in absolute terms the CAD rose by just around 10% in the year 2012-13, it spiked the CAD to GDP ratio past the 5% mark for the first time since the nineties. That was one of the major reasons why the Rupee slumped dramatically in 2013.
The Rupee recovered strongly in the year 2014. With oil prices plummeting from over $100 a barrel to below $ 5O / barrel, India’s oil import bill fell significantly. The current account deficit reduced and with a new Government in power, the investor sentiment had greatly improved. For the next three years low oil prices brought relief to India’s import bill and the current account deficit declined. But things changed after 2017. Oil prices rose significantly in the year ended March 2018 putting pressure on the Rupee. The trade deficit rose by a whopping 42% in 2017-18 to $160 billion as against $112.4 billion last year.
External debt and short term debt
Apart from the rise in the current account deficit, and fall in foreign exchange deficits, there are two other factors that influenced the Rupee valuation. One was the continuous rise in total external or foreign exchange debt and the second was the rise in short term external debt. India’s external debt in 2004 was $112.4 billion and well covered by foreign exchange reserves. The Vajpayee era was a golden period for the economy when inflows of foreign exchange was high and outflows were moderate.
But a decade later, in 2013, when the forex debt had grown more than three fold to $390 billion, the forex reserves had fallen to $292 billion. During this intervening decade, the Rupee skid from Rs 39 a dollar to Rs 66 a dollar. The short term debt rose sharply, particularly in 2013, to a quarter of the total debt. Basically oil, gold, coal and iron ore imports were financed by external commercial borrowings all to be paid back within one year.
The concerns of rising foreign debt and external commercial borrowings are there even today. The foreign debt rise is partly due to rise of non-essential imports funded by external commercial borrowings. While the unavoidable rise in crude imports and high international prices made oil imports go up by 29% to $71 billion, what was avoidable was the rise of gold imports that jumped by 22% to $33.5 billion and agriculture imports that went up by 15% to $29 billion. For some strange reason, pulses that is seeing a glut of prices saw jump of imports along with fresh fruits, and edible oils. It not only impacted the CAD adversely, but also the farmers who face volatility of prices.
As per RBI reports, the total external debt in the year ended March 2018 rose by 12.4% to $529.7 billion. The short term debt with maturity of less than a year rose marginally to 19.3% of the total external debt. The rise of external commercial borrowing by over 15% — from $172.4 billion in the year ending March 2017 to $202.3 billion this year – was, however, worrying, leading to the steady slide of the Rupee in the last quarter. This has led to the rise of short term debt to foreign exchange reserves to 24% this year, which is another parameter to closely watch. In 2013, it had gone up to 33% — an all time high since the nineties. This is something that needs to be kept in check, especially because India cannot afford currency volatility in an election year.