Narendra Modi used to see the value of the rupee, India’s national currency, as a mirror, reflecting the strength of the nation’s leaders and their economic stewardship.
During the 2013 “taper tantrum” — when emerging market currencies were battered by US interest rate rises — Mr Modi, then Gujarat’s chief minister, blamed the incumbent Congress-led government for the rupee’s sharp fall.
“Rupee is crumbling against the dollar. Rupee is in the ICU due to Congress,” he declared at the time.
This week, with Mr Modi prime minister since 2014, the rupee hit an all-time low, below the psychologically significant Rs70 to the dollar mark, as investors reassessed emerging market risk after the Turkish lira crisis.
But rupee weakness predates Turkey’s recent troubles. Since January, the Indian currency has fallen nearly 10 per cent against the dollar — one of the sharpest depreciations in Asia this year.
In a sensitive election year this is politically awkward for Mr Modi, who had vowed that the rupee would strengthen under his strong leadership. Shortly after the rupee breached Rs70 on August 14, the eve of India’s 71st anniversary of independence day, the Congress party tweeted a chart of the exchange rate and commented: “Modi finally managed to do something we couldn’t do in 70 years.”
Beyond the political posturing, economists are debating the cause of the rupee weakness and what it presages for India’s economy, which is regaining steam after the twin shocks of Mr Modi’s 2016 currency ban and an overhaul of the tax system last year.
Government economists say they are unconcerned, seeing the rupee weakness in the context of a wider emerging markets phenomenon as the US raises interest rates and Turkey’s difficulties alarm investors.
“Given various external factors— including the Turkey situation — the dollar is strengthening and the rest of us are weakening,” Sanjeev Sanyal, the government’s principal economic adviser, told a local television channel on Friday. “I do not think there is any reason to jump to any conclusion, or panic.”
Rajiv Kumar, vice-chair of NITI Aayog, a government policy think-tank, noted that the rupee had appreciated by 17 per cent against the dollar in the past three years. “The rupee should be realistically valued,” he said. “It should not be overvalued. In some senses, it is coming down to its natural value.”
Others say this year’s sharp depreciation reflects India’s significant economic vulnerabilities, including its dependence on imported oil, sluggish export growth and continued heavy reliance on government spending as an economic driver, while private investment remains tepid.
In July, India’s trade deficit widened to a five-year high of $18bn. India Ratings, the local arm of the rating agency Fitch, has predicted the current account deficit — the difference between national savings and domestic investment — will hit 2.6 per cent of gross domestic product this year, up from just 0.6 per cent two years ago.
Underpinning this widening deficit is the Indian government’s fiscal deficit, which has been persistently high when national government and state governments are combined. Many warn the fiscal deficit will rise even further, as Mr Modi and state leaders step up spending ahead of national elections next year.
Jahangir Aziz, head of emerging research at JPMorgan, said: “Whatever the government says about trying to bring down the deficit, overall the deficit in India has been more or less steady at 6 or 6.5 per cent of GDP, and this year it is going to go above 7 per cent of GDP.”
He said this heavy government spending was forcing private companies that wanted to invest to seek capital abroad, contributing to the widening current account deficit.
For all the factors now driving down the currency, analysts say the overall economic impact will depend on the extent of the depreciation — and whether the rupee slides gradually or plunges suddenly, which the Reserve Bank of India has been working to prevent by intervention in the markets.
Some say modest depreciation, especially against other Asian currencies, could help bolster India’s sluggish exports.
“India is just not quite delivering on the growth front like we might have expected a couple of years ago,” said Richard Yetsenga, chief economist at ANZ Research. “A modest amount of currency depreciation is probably useful. It will help the competitiveness of the export sector.”
If the currency were too weak, he added, “it can threaten supplies of foreign capital and destabilise markets. But I don’t think we are at that point yet”.
Others foresee continued pressure on the rupee — which will stoke domestic inflation and eventually force the RBI to raise rates, hitting growth. JPMorgan’s Mr Aziz said: “It’s almost impossible to think of a scenario in which the Indian currency will appreciate or be stable because India is running too large of a fiscal deficit.”