It’s not that bad for Re if you believe Nomura


NEW DELHI: After witnessing three currency crises in a decade, India is watching the rupee’s zigzag show, wondering if it is headed for a fourth. India last witnessed currency crises in 2013, 2011, 2008 and 1997.Former Reserve Bank governor Raghuram Rajan hopes the rupee does not go in for a free fall, and RBI would do what it takes to tame inflation.Economists feel the apex bank has enough armour in its war chest to restrict further fall in the local unit.After a steady drop, the rupee saw a rebound on Wednesday. On Friday, it opened 49 paise higher to trade at 71.70 to the dollar. For the year, it is down 11 per cent against the greenback. It lost 1 per cent in the first 10 days of September.By nature, the rupee is not fragile. If anything, it is vulnerable to external shocks. That’s the finding of a study on 30 emerging market currencies, based on the noise-to-signal approach.In Nomura’s Damocles index, an early warning gauge, India stood at 25, signalling relative stability compared with its peers. The Damocles index is based on eight key indicators which help strike a balance between false signals (noise) and real crisis signals and it assesses the risk of an exchange rate crisis up to 12 months in advance.These indicators include import cover ratio, the ratio of forex reserves to short-term external debt, current account balance, short-term external debt real, short term interest rate and M2/FX reserves.A Damocles reading above 100 is interpreted as a warning signal that a country is vulnerable to an exchange rate crisis. A reading above 150 signals that a crisis can erupt any time, which is currently the case with Sri Lanka. China’s Damocles score stood at 37 and Malaysia’s 62.


(Image source: Nomura India)“India’s most recent currency crisis occurred in 2013 and was due to weak domestic macro fundamentals and worsening external funding conditions. Since then, CPI inflation has moderated (to 4.5 per cent in 2018 from 9.7 per cent in 2012), as has current account deficit (2.5 per cent of GDP versus 5 per cent). Real rates are positive (2 percentage points versus minus 2 percentage points) and the central bank has a sufficient FX reserve buffer (9.3 months of import cover versus 6.4),” it said. Here’s a list of currency crises seen in various countries since 2001:


(Image source: Nomura India) Analysts noted that since the 2008 global financial crisis, emerging markets received 50 per cent of capital flow compared with 20 per cent in the pre-crisis period. India has been a key beneficiary of the global liquidity boom, receiving around $170 billion flows from foreign portfolio investors (FPI) between 2009 and 2017.“India’s twin deficits continue to be its Achilles’ heel, and to that extent the rupee depreciation has been in line with comparable EMs. However, India’s macro fundamentals are stronger than what they were during the taper tantrum in 2013. Our forex market financial conditions index has deteriorated, but it is yet to hit crisis levels of August 2013 and 2008. Several EMs have embarked on interest rate defence of their respective currencies. We are not ruling out a rate hike by RBI in the near term,” said Nirmal Bang Institutional Equities.Central banks of several twin-deficit countries – Argentina, Mexico, Turkey, Indonesia and the Philippines – have raised interest rates in defend their currencies. RBI, too, has hiked repo rate in last two policy reviews.

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