The Covid-19 pandemic has plunged the Indian economy into an unprecedented recession. Hundreds of small businesses have closed, unemployment is on the rise and household income decreases. But despite this upheaval, the Indian currency has remained surprisingly stable.
On July 7, the Indian rupee was valued at 74.62 per dollar against 75.66 in the last week of March 2020, when the pandemic first hit the coasts of the country.
Experts believe that a combination of global and domestic factors have helped the rupee stay strong, and most of the reasons relate to India’s positive long-term outlook. “People digested that the lockdown would cause the economy to contract very quickly. They focused on how fast the economy was doing, ”said Abheek Barua, chief economist at HDFC Bank. “The rupee has therefore outperformed its peers in Asian emerging markets.”
The Indian rupee and the Covid-19 pandemic
At the end of March 2020, when India entered a sudden and unprecedented lockdown, the Indian currency felt a bit of heat for a while. In April, the rupee hit a record low of 76.92 against the dollar. There was nervousness among global investors, which was also evident in the stock markets which almost fell into free fall.
However, India’s central bank quickly stepped in to calm the nerves. The Reserve Bank of India (RBI) has requested at least three unscheduled briefings for political announcements, to show seriousness in supporting the economy. The central bank has taken unprecedented steps, including reducing the repo rate, the rate at which it lends to banks, by 115 basis points so far. The measure was intended to encourage banks to lend money to businesses so that they can survive tough shutdowns.
In fact, several central banks around the world have done the same, and it has worked in India’s favor. With interest rates low in other countries, global investors flocked to emerging markets, flooding India with liquidity. So basically even when the Indian economy was on the verge of a recession, foreign investors were putting their money into the country.
“The net result of so much global liquidity has been to decouple the financial markets from what is happening on the ground because of the pandemic,” said Barua of HDFC Bank.
India and Asia
What has also helped India is the fact that it has greater shock absorbing capacity compared to its Asian peers, according to experts. “(Take) the case of Thailand, for example. Tourism is such a big support and that has collapsed. Investment opportunities, in general, were already limited in these economies. They are a bit too expensive in terms of salary levels to offer serious offshoring opportunities, ”said Barua.
India also remains a preferred destination for investors due to the low per capita income compared to other Asian economies.
Total foreign direct investment in India increased by 10% in one year (pdf) in fiscal year 2020-21 (April-March) to a record high of $ 81.72 billion (Rs 6.08 lakh crore), according to data released by the Ministry of Promotion of industry and domestic trade in May.
Singapore was the biggest investor, with a 29% share during the year. It was followed by the United States with 23% market share and Mauritius with 9%, according to the data.
Most experts are of the opinion that despite the devastating second wave of Covid-19 and the anticipation of the third wave by August, the Indian rupee is expected to remain strong in the long term.
India’s currency management
Over the past two months, the Indian rupee has come under some pressure due to the rise in global crude oil prices. However, the RBI’s exceptional foreign exchange reserves are good enough to prevent the rupee from weakening sharply in bad times.
As of April 2020, India’s central bank has added $ 134.34 billion to its coffers, bringing total foreign exchange reserves to $ 608.99 billion (pdf) as of June 25. It is the highest foreign exchange reserve ever held by India.
In addition, central banks around the world are expected to continue to keep their policy rates low, especially given recent concerns about the delta variant, which could lead to an increase in Covid-19 cases in countries that have had some respite from the pandemic in recent months.
“While the recent surge in crude oil prices and volatile financial markets have caused a dent in the performance of the rupee, continued foreign interest accompanied by a drop in the number of new infections and the rate of vaccination will likely limit the results. losses (in rupees), “said Shashank Mendiratta, economist at technology company IBM India.