Published blog Details

Posted by: Deepa Vasudevan on Tue, Aug 21st, 2018

Booming Sensex, Crashing Rupee

In 2013, when the taper tantrum set off an emerging market currency crisis, the rupee fell by 13% against the US dollar. The BSE-Sensex mirrored market anxiety by falling almost exactly in line with the depreciating rupee; and then rising slowly as the exchange rate stabilized (Fig 1). This year is different. The rupee has dropped nearly 10% against the US Dollar, but the Sensex has gained over 12% (Fig 2). In other words, while the external value of the currency is depreciating, the most widely tracked index of market sentiment is booming and touching new highs. What explains this phenomenon?

 

Figure 1: Sensex and Rs./$ Exchange Rate

 

Figure 2: Sensex and Rs./$ Exchange Rate

Source: Sensex data from www.bseindia.com, exchange rate from RBI. For each year, the value for 1 Jan is set at 100 for both sensex and nominal Rs.$ exchange rate

 

The explanation lies in the different reasons underlying the collapse of the exchange rate in 2013 and 2018. The crisis of 2013 was due to India’s external account vulnerability- high current account deficit driven by high oil and gold imports, rising short term debt, and a sudden pull-out of foreign portfolio inflows reflecting a lack of confidence in the economy. However, the weakening of the rupee in 2018 is largely due to geopolitical reasons: the US-China trade war, rising protectionism in trade partners, volatile oil prices, and strengthening US dollar. These factors are certain to push up India’s current account deficit (market estimates for FY19 CAD range between 2.6% to 3% of GDP), but, nevertheless, global investors seem to be confident about the India growth story. The economy is expected to grow at around 7.5%, RBI has acquired a reputation for managing inflation, income tax collections have risen, and GST systems seem to be stabilizing. A view is emerging that the depreciating rupee may actually improve growth by (i) benefiting exports (especially revenues of IT firms, which form a significant part of stock indices) and (ii) increase market shares of domestic producers by making imports more expensive.  At this point, domestic fundamentals appear sound enough to overcome the rupee’s fall. No surprise then, that foreign portfolio investors returned in July and August with $1 billion of inflows, after three months of continuous outflows! That is why the Sensex can afford to ignore the weakening rupee and look forward, instead, to stronger growth and higher profits!

For detailed knowledge on exchange rate and external sector subscribe to our course today. You can also check other courses in Macro Economics offered by CIEL.

Post comment

Subscribe to Newsletter

We will never share your email address with anyone and won't bombard you with emails. Refer to our Privacy Policy

Online Courses

Macro Economics
Basic Level
MACRO ECONOMICS MADE EASY

This course gives you a thorough understanding of the key concepts in macro-economics and how to apply them

Macro Economics
Intermediate Level
UNDERSTANDING MONETARY POLICY

Monetary policies are designed to maintain price stability and ensure economic growth. Learn how monetary p

Macro Economics
Advance Level
EXCHANGE RATE AND EXTERNAL SECTOR

Understand how exchange rates fluctuate and the various factors that influence them through this online cou

Macro Economics
Advance Level
GOVERNMENT FINANCES AND FISCAL POLICY

Learn about the different sources of government revenue in economics and the implementation of fiscal polic

Macro Economics
Intermediate Level
MACRO ECONOMICS INDICATORS 1 - OUTPUT AND GROWTH

Learn how to measure economic growth and output through the macroeconomic indicators that influence it.

Macro Economics
Intermediate Level
MACRO ECONOMICS INDICATORS 2 - INFLATION

Learn about the macroeconomic indicators of inflation and their management through this online course.

Contact us

Please learn more about our Privacy Policy