Expert Zone

Straight from the Specialists

Will the rupee fall further?

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

On May 31, the rupee fell to an 11-month low of 56.51 to the dollar. It wasn’t the only currency to suffer a loss. Most currencies depreciated during the month; some more than the others.

The appreciation of the dollar reflects an improvement in the performance of the U.S. economy and partly the related possibility of the phasing out of quantitative easing (QE) by the U.S. Federal Reserve. The latter would make the dollar even scarcer.

The rupee and the yen lost the most. The behaviour of these currencies in May was rather unusual and trends are different if seen over a longer period. In the past year, for instance, the yen fell 27 percent because of its planned weakening by the Shinzo Abe government to boost an economy bordering on recession. But a number of other currencies in emerging market economies such as South Korea, Thailand or Malaysia appreciated largely because of hot money inflows from quantitative easing. Some of these countries have or are likely to adopt capital controls. Brazil’s finance minister called it the ‘currency war’.

India has a different story to tell. The rupee has been weakening because of internal depreciation caused by high-paced inflation. From 45 to the dollar, it lost 25 percent in about 25 months.

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