How pandemic reshaped Indian Rupee as the Worst Performing Currency

across Asia!
A foreign-exchange rate is the rate at which one national currency will be exchanged for
another. It is also regarded as the value of one country's currency in relation to another
currency. Each country determines the exchange rate regime that will be applied to its
currency. It may be floating, pegged (fixed by Government), or a hybrid. The rate depends on
the value of each currency and, thus, on the economies of both countries. There are 3 primary
economic factors that affect the foreign exchange rate:

 the relative purchasing power of each currency;

 the investment opportunities and risks of each
country, and
 the desirability of the goods and services of each
country.

When we are making trades in the forex market, we are basically buying the currency of a particular
country and simultaneously selling the currency of another country. There's no physical exchange of
money from one hand to another. Traders usually take a position in a specific currency, with the
hope that there will be some strength in the currency, relative to the other currency, that they're
buying (or weakness if they're selling) so they can make a profit.

Currency depreciation is the decline of a currency’s value in relation to another currency. It

specifically refers to currencies in a floating exchange rate – a system in which a currency’s value is
set by the forex market, based on supply and demand. The opposite of currency depreciation is
currency appreciation, where a currency becomes stronger. Forex traders can take advantage of
both appreciation and depreciation, by taking a long or short position depending on their market
predictions.

With more than 158,992,163 cases and 33,07,496 deaths worldwide Covid-19 virus continues to
wreck havoc in the world. The dreading pandemic has caused yet another massacre in the downfall
of the economies. India overtook Brazil to become the 2nd worst-hit nation with COVID cases in the
World. The surge in infections has led to the re-imposition of lockdowns in the affected cities and
states. Delhi, India’s political capital extended its lockdown for another week while the nation
reported 403,736 new virus cases and more than 4,000 Covid-19 deaths. The streets are mostly
empty and the markets nearly deserted with almost all shops closed in response to curbs put in
place to fight the pandemic. The scene is not so different in Mumbai, the financial hub that accounts
for 6% of the national output. Mumbai went into a tailspin, as many coronavirus hospitals reported
severe shortage of bed and oxygen supplies. Modi’s political allies, top business leaders and even
U.S. President Joe Biden’s chief medical adviser have said lockdowns could be the only way to stem
the world’s worst virus outbreak. As India braces itself to face the brunt of the pandemic, it is
simultaneously staring at the economic tsunami. From being a better performing currency in the
previous quarter for merely two weeks to turning into a weak one, has made Indian rupee turned
into the worst-performing currency in Asia.
The rupee averaged Rs 74.10 to a US dollar on Dec 2020 as against Rs 72.2 at the end of December
2019. As emerging markets came under pressure and with about a week left for the year to end,
the Indian currency looked to be the worst-performing Asian currency in 2020 with losing 12
percent. So far, the rupee had depreciated 3.5 percent to 73.52 per dollar during the year
against appreciation of other Asian currencies such as the Chinese renminbi, Philippines peso, South
Korean won, Malaysian ringgit. Thai baht, which is heavily dependent on tourism has depreciated
1.42% in 2020. In contrast, most Asian currencies have either appreciated against the US dollar in
the last 12 months or retained their value.

The rupee has now depreciated by more than 5.3% in 2020, with the bulk of its losses, a 4.1% slide,
having occurred in March. Few weeks back the rupee weakened past 75 per dollar for the first time
in eight months. It is only expected for the rupee to trade only slightly weaker over the near term
from current levels. Federal Bank Ltd. anticipates it to fall further to 76 by the end of the year as
COVID-19 cases continues to rise in India.

While the outbreak has overwhelmed the nation’s hospitals and crematoriums, it’s also hit
consumer confidence in an economy that was only beginning to recover from an unprecedented
recession last year. “This will have a knock-on impact on the re-opening of the economy and
recovery prospects.” Said Kristy Fong, senior investment director for Asian equities at Aberdeen
Standard
Analysts have already trimmed India’s growth forecasts as individual states
tightened restrictions, but a nationwide curb could deal a much larger blow to the
economy.

This downfall has been caused by various factors, including several

government restrictions after India started recording nearly 2 lakh COVID
cases daily.

The rupee’s latest moves have sparked a debate in India.

The prospect of stricter curbs is reviving memories of last year when similar
measures dragged India’s economy into its worst contraction in four decades.

It’s also threatening to weaken the rupee, which is among Asia’s top three
performers this month, thanks to heavy foreign inflows for initial public offerings, a
dovish Federal Reserve and a glut of dollars at state-run banks. “The recovery in the
rupee in recent weeks reflects the softer dollar and weaker import demand as
restrictions were imposed,” Khoon Goh, head of Asia research at Australia

Goh forecasts the rupee to fall to 76 per dollar in the second quarter but expects
further declines to be limited by a reduction in imports.

The Reserve Bank of India stepped in last week to provide loan relief and pledged to
inject 500 billion rupees ($6.8 billion) of liquidity to support growth.

The currency could remain supported as expectations of a surge in IPOs this year
keeps inflows coming, although its near-term trend points to a downside as virus
cases show no sign of slowing.

Just two weeks ago, the International Monetary Fund upgraded India’s economic
growth forecast to 12.5% -- the quickest rate among major economies. Now, as Covid-
19 cases surge the most globally, that bullish view is looking increasingly in doubt.
The Reserve Bank of India this month also retained its growth estimate of 10.5% for
the current fiscal year. But Governor Shaktikanta Das said the surge in infections
impart greater uncertainty and could delay economic activity from returning to
normalcy.
High-frequency data are already pointing to a deepening contraction in retail activity in
the week through April 18 relative to its pre-pandemic January 2020 level, said
Bloomberg Economics’ Abhishek Gupta. That’s a key risk for an economy where
consumption makes up some 60% of gross domestic product.

Although policy makers have signaled they are ready to take steps to support growth,
a failure to flatten the virus curve could exert pressure on monetary and fiscal
policies that have already used up most of the conventional space available to them.
“The rising burden of case counts could prove to be a negative distraction to the
growth momentum and economic recovery,” said Shubhada Rao, founder at
QuantEco Research in Mumbai

With India having a crude oil import dependence of more than 80 per cent of its needs, rising
global oil prices driven by a global economic recovery in 2021, will see a worsening of the
nation’s terms of trade, and put depreciatory pressure on the rupee.
Fitch sees Brent crude oil to average USD 53 per barrel in 2021, versus the 2020 year-to-date
average of USD 43.18.
It also expects another 50 basis point cut in benchmark interest rates by the Reserve Bank of
India (RBI), which will also exert some downward pressure on the rupee.
“That said, two factors will partially offset the depreciatory pressure on the rupee. First, loose
US fiscal and monetary policy will likely continue exerting downside pressure on the US
dollar into 2021, which would partially offset rupee weakness.
“Second, the RBI, with a foreign exchange reserve position of USD 578 billion as of
December 2020, representing an import cover of around 19 months, will likely intervene to
prevent excessive rupee weakness to manage imported inflation to reduce the risk of high
inflation derailing India’s recovery in 2021,” according to Fitch.
In the early trade, the rupee fell by 17 paise to 75.22 against US dollar and this
depreciation is expected for some time.

At the interbank foreign exchange, the domestic unit opened sharply lower at 75.19
against the dollar, and lost further ground to quote at 75.22, a fall of 17 paise over its
previous close. In early deals, it touched a low of 75.23.

The US Treasury Department recently added India to its list of major currency manipulators.
It further commented that India must allow its currency to adjust based on the economic
principles. They must only intervene when the currency is excessively volatile. Recently, the
sterilization of rupee caught the eye of US monitors. Hence, they may force the RBI to let the
Indian currency strengthen against the US dollar.

In 2020, India has received more than $50 billion through the FPI and FDI routes.
Foreigners have bought equities worth $17.7 billion and sold $14.5 billion in
debt with net inflows of $7.7 billion in CY2020, as per the official data from
NSDL.
However, a recent report by HDFC Securities noted that despite substantial
foreign inflows, the rupee did not revive since the RBI absorbed almost all dollar
inflows through regular interventions to restrict the currency from appreciating
to maintain export competitiveness.

Not just is there is a downfall in the value of the Rupee, but there is a
bloodbath happening in the stock market as well, forcing the traders to do
nothing but wait for the better days to come. This downfall has made
Rupee go down to as low as 75% than a Dollar, making several trading
and exporting options with the foreign countries difficult. Experts have
warned that the situation of the Indian economy and Rupee will witness a
downfall even more as there is a resurgence of COVID with even more
intensity than ever before.

The economy has shattered to such an extent that it will take another

decade to come back to the level as it was in pre-COVID times. The most
affected people are the businessmen and traders whose trading has been
halted, and there is no going back now.
The fixed Rupee INR = IN was 75.14 / 15 per Dollar, up from 0710 GMT,
after touching 75.32, which is the lowest since July 15 last year. Money
ran out at 75.06 on Monday.

  “One of the reasons why the Rupee has remained stable or not appreciated
compared to its peers is... RBI’s intervention in the markets on both sides i.e., on
the sell-side and on the buy-side of things,” Sriram Iyer, Senior Research Analyst
at Reliance Securities said.
During the year, RBI kept buying the weak US dollar, thereby increasing the
demand for greenback vis-a-vis Indian rupee.

We continue to see Rupee underperform despite huge amounts of foreign fund

inflows into domestic markets even as global central banks continue to maintain
their accommodative monetary stance, along with major economies maintaining
loose fiscal stance...
It saw depreciatory pressure on the rupee due to worsening terms of trade from rising oil
prices, further monetary easing, and bouts of risk-off sentiment being partially offset by the
US dollar weakness and central bank foreign exchange intervention to combat imported
inflation.
“Over the longer term, the overvaluation of the rupee in real terms and higher inflation in
India vis-à-vis the US should exert weakening pressure for the rupee,” it said.

 the central bank will most likely face more difficulties in curbing the rupee’s gains against
the US dollar.

1 Indian Rupee equals
0.014 United States Dollar
10 May, 8:02 am

1 United States Dollar equals

73.41 Indian Rupee
10 May, 8:09 am