India’s rupee broke above a benchmark barrier of 90 rupees per dollar this week, continuing a 10-year weakening trend even as its economy is expected to grow at a rate of 6.2% per year.
This latest bout of rupee weakness has been attributed to the breakdown of trade talks, with the U.S. imposing a 35.18% effective tariff as of Nov. 13 on imports from India.
This softening came amid reports that the Bank of India was selling small amounts of dollars, which moderated the rupee’s decline.
Still, the rupee has been depreciating at 3.7% per year since the start of the Modi administration in 2014. And the forward market is now projecting a 3.1% yearly decline over the next five years.
In its latest assessment of India’s economy, the IMF finds that faced with an uncertain external environment, an easing of India’s monetary policy and greater exchange rate flexibility would help absorb external shocks.
For global firms that operate in India, that means their balance sheets will be affected by a liberalized policy structure, which implies more volatility not less, and requires more sophisticated hedging strategies.
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The Modi administration has already undertaken structural changes that have facilitated domestic private consumption and increased living standards.
India is less exposed to global trade than other Asian economies, and its large domestic market holds the potential for resilience and growth.
In our evaluation, the Bank of India’s intervention in the foreign exchange market is a stumbling block for India’s attaining developed-market status.
The foreign exchange market is the first line of defense for any economy, a buffer to both external and domestic shocks.
Furthermore, the absence of government interference in the FX market would allow for expansion of India’s bond market and encourage foreign investment in India’s assets. Both are necessary components of the greater national modernization project in India.
