As India’s Prime Minister Narendra Damodardas Modi looks to secure a third term in 2024, most would agree that his strongest suits have been infrastructure push and last-mile delivery of welfare schemes. Now, PM Modi’s Bharatiya Janata Party (BJP) can add exchange rate management to the list.
The Indian rupee (INR, ₹) held steady against the U.S. dollar in 2023, depreciating just 0.5% to end the year at 83.17 per USD. Notably, the Chinese yuan and the Korean won, currencies of current account surplus nations, depreciated by nearly 3%, under-performing the rupee. Such has been the rupee stability that at one point in November, the USD/INR’s 30-day moving standard deviation, a measure of realized volatility, dropped to 0.08, reaching the lowest since February 26, 2007, according to data sourced from Macromicro.
While the rupee’s 2023 stability is consistent with other advanced nation currencies like the euro, it contradicts past data that shows the Indian unit tends to depreciate in the pre-general election year. Since 1984, India has held 10 Lok Sabha elections. Except for 2003, the rupee has depreciated in all pre-election years since 1984, falling over 5% against the U.S. dollar. On four occasions, the depreciation was in double digits, data from TradingView show.
The latest stability is remarkable because the Federal Reserve (Fed) has raised interest rates from near zero to a 22-year high of 5.25% since kicking off the so-called tightening cycle in March 2022. The central bank has reduced its balance sheet size to $7.72 trillion from roughly $9 trillion in early 2022.
Monetary tightening lifts bond yields and attracts capital and, absent sterilization, leads to an appreciation of home currency. The rupee tanked hard in 2013, depreciating from 55 per USD to 68 per USD between June and September, as the Fed hinted at tapering the liquidity-boosting balance sheet expansion program. Back then, interest rates in the U.S. were still at zero. Furthermore, the Russia-Ukraine conflict and tensions in the Middle East have accompanied the Fed’s latest tightening cycle, strengthening the case for holding dollar-denominated assets. The greenback, the global reserve backed by the world’s largest and most liquidity government bond market, has long been treated as a haven by investors.
According to experts, the Modi government is at least partly responsible for INR’s envious stability.
“Stability in inflation rate via sound monetary policy and effective fiscal policy have been major contributors to low volatility. The clean up of the banking system and series of structural reforms has also played a positive role,” Anindya Banerjee, head of currency derivatives research at Mumbai-based Kotak Securities, said.
The credit also goes to the Reserve Bank of India’s strategy of actively targeting volatility and the relative rupee value.
“Over the past 10 years, the RBI has switched its exchange rate policy from intervention of last resort to low volatility through active management. They have built large reserves and expanded their footprints through exchanges, non-deliverable forwards and over-the-counter markets,” Banerjee said, adding, “They buy aggressively when the dollar is weak, like in 2020-21. They sell aggressively when the dollar is strong. I expect them to continue this policy over a long period.”
Speaking of global macroeconomic conditions, India has found itself in a sweet spot in the post-coronavirus world, attracting $237 billion in FDI inflows in the three fiscal years, thanks to its relatively better debt-to-GDP position. India’s government debt as a percentage of GDP is roughly 82%, significantly lower than the U.S. ‘s 126% and the global average of 93%, according to data tracked by VisualCapitalist, which makes it an attractive destination for global investors looking for havens in the post-covid age of financial repression in the advanced world.
Voter illiteracy is an issue
PM Modi will likely struggle to draw political mileage from the rupee’s stability as most Indian voters are misinformed about determinants of exchange rates and their implications for the economy.
Early this year, the National Centre for Financial Education (NCFE) report showed that over 73% of our adult population failed to understand basic financial concepts, according to Education Times. Most adults look at the USD/INR numbers going up and panic over the rupee’s drop, ignoring that India’s consumption-driven, energy-dependent economic model means the path of least resistance for the INR will always be on the downside. The rupee becomes a headache when it depreciates too quickly, as in 2013, providing negative feedback to the economy through higher import costs. Such episodes have been few and far between since then, with increasing FDI inflows supporting the rupee.
However, to the general population, rupee depreciation, whether slow and steady or a rapid slide, is a national shame and a sign of ineffective government. A simple search query for “rupee falls” on social media platform X (formerly Twitter) will reveal the degree of fear, uncertainty, and doubt whenever the rupee depreciates.
Indian politicians across the board, including BJP, are guilty of promoting this faux rupee nationalism over the years.
For instance, a Congress article, dated Aug. 7, 2022, said the rupee has been falling drastically under Modi’s leadership, ignoring the mid-2013 slide from $55 per USD to 68 per USD and falsely claiming that the rupee held strong at around 58 per USD during Manmohan’s rule. The article conveniently ignores that much of the rupee’s late 2013 and early 2014 recovery to 58 per USD was driven by the Modi wave and the Fed delaying the eventual unwinding of stimulus.
That said, Modi’s main rival, Rahul Gandhi, provided a glimmer of hope last year after he refused to criticize the government mindlessly for the rupee depreciation.
Lets hope, the rest of the Congress party and other regional parties follow Gandhi’s lead.