Emerging markets are fickle and so are their currencies . Not many can forget the horrendous turmoil the EM currencies went thro’ late Aug last year when the tapering tantrums surfaced ( reduction of bond purchases by Fed , referred to as QE tapering) . EM currencies collapsed across the spectrum . India was one of the worst hit among EM peers . Indian Rupee bore the brunt of it crashing to all time low ( nearing 70 level) on twin deficits fears ( CAD and fiscal) and on regressive political climate then .
It has not been a smooth ride for EM currencies since then , though some stability returned early this year in the first quarter of calendar year . But the relief proved to be short-lived with Fed jitters ( impending Fed tightening cycle) coming back to haunt the fragile five once again . On improved growth outlook for US and on expectation of early fed rate hike cycle , Dollar is gaining strength against major currencies including Euro and Yen . Dollar index which used to be around 80 level not long back , has firmed up to 84+ level now . This has left the EM currencies in the lurch with most of them falling over 6%+ from their April levels . But what has gone largely unnoticed is the way the Rupee has been responding to this new evolving crisis . It is the story of resilience . With most of the EM currencies in dumps , rupee’s exceptional stability has put India back in limelight among global investors . It will not be a surprise if Morgan Stanley which coined the term “Fragile Five” gets tempted to drop India out of this infamous list . Resulting “fragile four” still rhymes well and so could be the next catchy phrase to describe the vulnerable group of EMs ( Turkey , Indonesia , Brazil and South Africa).
Much of the credit for this rare moment should go to India’s growing “political currency” after stunning election results that brought a stronger and stable governance to the country . This , added with Rajan Effect ( Bond man of the Mint Street ) is proving to be a lethal combo in averting any potential crisis for Rupee . Strong flows into both equity and debt markets on account of this duo effect coupled with improving macro ( declining current account deficit and improving fiscal deficit on stronger growth outlook etc) have made a big difference to Rupee’s reaction in this EM turmoil .
Below chart captures Rupee’s relative strength brilliantly by plotting the fall in the respective currencies against the dollar over last six months ( April’14 to Sep’14). It is striking to note that the Rupee barely moved in this mayhem firmly holding on to the 60 level . Rouble was the worst hit with 8.17% fall , followed by Brazil Real at – 6.55% , Indonesian Rupiah at -5.75% , Turkey Lira at -5.52% , Argentina Peso at -5.42% and South African Rand not far behind at -4.93% .
So much so for all the doomsday forecasts for Rupee by punters and pundits alike last year . Much time has passed since then and India story is back in vogue now with a renewed vigor . This does not mean that our currency will not be vulnerable to volatile capital flows . Fickle flows can still wreck wobble on the Rupee in the short-term , but unlikely to have a lasting impact given the improving macro and the growing confidence of global investors on both RBI Governor and on the current political leadership .