Currency depreciations and why 2018 is not 2013

So INR has breached 70. Is Indian economy in trouble because of this? Should you be worried about your investments?

Well not really. As a general rule (not law!), the currency of a country will depreciate against the USD if the country’s inflation is higher than US inflation. So till the point India has a higher inflation than US, INR will continue to depreciate against dollar.

INR hitting 70 is only depreciation against the USD. If you check it against CAD or EUR or GBP, there has been hardly any depreciation.

Yours truly had been asking for people to buy USD for last 6months. All the parameters were pointing towards INR fall:

1. Indian elex and uncertainty
2. Govt kicking the fiscal mgmt out of the room (not the window)
3. US yield
4. US tariff war
5. Shoring up exports
6. Forex reserve buildup
7. Sanctions on Iran

Indian elex, Govt kicking the fiscal mgmt:

As elex dates comes closer, the govt tend to spend more. More spending starts to appear on the inflation number (with a lag). However, the market and its participants are not fool. They see the spending coming and the uncertainty and they move to safer havens (read USD). More USD is bought and more INR is sold.

US yield:

Probably the biggest reason for USD strength. US treasury yields are over 3% now. It is more than the dividend yield on blue chip companies and money is moving into bonds chasing this yield. The movement is happening from across the world. Hence USD is becoming stronger everyday against all the currencies

US tariff and tax cut:

Apple has some $100B in cash and yet it borrows money via bonds? Why? Because a lot of it’s cash is “trapped” outside US in China and India. That money doesn’t reach back to US because of taxation and several other factors.
Uncle T reduced this tax and companies are moving billions everyday back to US by selling their local currency in other markets
Add to the fact that tariff wars are being fought by depreciating of currencies by other countries

Forex reserves and export:

RBI has build up a solid reserve of forex and can easily defend the INR. However it is playing a small game right now to save the slide and India has finally joined the world in fight the US with depreciating its currency. A brave and welcomed move

Sanctions on Iran:
Sanctions on Iran has always followed by a spike in oil prices. Higher oil prices means the govt has to buy more dollars to buy the same quantity of oil. More USD buying, weaker the INR gets.

Overall this fall was expected and it is a good fall. Mostly because it a slow fall.

Back in 2013, he currency fell from 53 to 68 in a span of 4 months. It was chaos. I was in London and I saw GBP move from 78 to 101. That fall was not against one currency but general weakness in the economy because of sustained inflation, poor policies and ineffective governance.

Yes the illiterate of the world are making fun of INR at 70. But hold on, in 10yrs from now, you will see INR at 85.

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