Dollar Rupee equation is evolving more rapidly. This currency trading is turning out to be more volatile than it should be. This volatility could impact importers and exporters alike and could cause their margins swing hugely.
Anyone with basic economic 101 class can tell that Indian Rupee should get stronger and US dollar to weaken based on economic prospects. However, these days the economic dynamics are pushed to back burner and other interesting variables are coming to the forefront and are deciding the Currency exchange rates. These variables though are temporary and short term in nature are causing huge disruptions to exporters and importers in India.
Lets discuss this in detail.
Until few months ago, India was pampered to be major economy going forward. The stock market rise and Strength in Rupee reflected that. Indian rupee touched RS 38 (approx) for one dollar.
Indian Commerce minister also increased export targets year over year and we started earning huge amounts foreign currency (especially US dollars). Indians also remitted huge amounts of dollars.
Obviously all those above factors helped strengthen rupee and weaken dollar. Quiet interestingly, there are other factors too that influenced strength of Rupee and stock market gains. Global speculators swamped Indian markets with cheap money (borrowed from Japan, bought dollars, sold dollars in INdia and bought rupees) and invested in all asset classes including Real estate and stock markets.
This sort of created bubble in our markets and this got busted.
Naturally the global speculators sold their assets and are still selling to cover their margin calls elsewhere and are running away. This time, they are selling Rupees and buying dollars causing stock markets to crash and also weaken Indian Rupee. Hence, Indian rupee traced back to RS 50 levels for each US Dollar.
In reality Indian and Chinese markets should have offered a cushion for global investors. Instead, markets are collapsing due to sell off by speculators. Also, one more issue compounding Indian markets is, our companies have huge debt obligations to meet. They borrowed heavily in dollars denominated in Yen. As Yen strengthens, their debt obligations rise and also interest payments.
Also, refinancing those debts in current markets is very difficult. This is where Indian government should step in and help refinance our Indian companies debt at cheaper rates. This will also put our Dollar reserves to good use.
Coming to back Dollar Rupee fluctuations…..
With IT exports diminishing due to US markets collapse and also collapse of other export segments like textiles etc, dollar inflow will be drastically reduced in coming months and years. Also, India imports more than it exports and all these imports are funded via dollars. So,there will be huge dollar demand in India. This alone will drive rupee to 60-70 levels in coming months.
RBI will be biggest buyer of dollars and Rupee keeps weakening. As long as Dollar retains its status of global trading currency, Indian Rupee has a chance to weaken further.
Any drop in US sovereign bond rating or efforts to replace dollar as global trading currency will result in Dollar crash. The mounting US trade deficit and mounting public and government debt will also add to dollar crash.
This will automatically strengthen Indian Rupee.
Any drop in Indian Sovereign bond rating, defaults from major companies with huge external debts etc could weaken Rupee and also cost of borrowing.
Keep watching this space for further updates
