Once global turmoil subsides, the dollar will cool off fast

TThe Indian rupee has depreciated, as it went from the level of Rs 74.5 per dollar in February 2022 to almost Rs 80, before appreciating again to Rs 78.69 on August 2, 2022. Due to this weakness, there is a natural concern among the policy makers.

If we calculate from 1991 till now, the rupee has been depreciating against the dollar at an average rate of 3.03 percent annually. Significantly, the rupee has depreciated by 7.28 per cent in the last 5 months. In the past, the rupee had been weakening not only against the dollar, but also against many important currencies, including the euro, pound, yen, yuan.

Since 1991, the rupee has depreciated 137 per cent against the pound sterling, 489 per cent against the euro, and 241 per cent against the yen, while the depreciation against the dollar has been 252 per cent. This means that in the long run, the rupee has weakened against all the important currencies.

But there has been a change in the depreciation trend of the rupee in the last five months till July 2022. While the rupee has weakened by 7.28 per cent against the dollar, it has gained 6.31 per cent against the pound sterling, 10.77 per cent against the yen and 4.72 per cent against the euro.

When the dollar is getting stronger against all the major currencies of the world, the question arises whether the winning streak of the dollar will continue in future also? The US economy is the most indebted in the world. Today, the US has an external debt of $30.4 trillion, China and the UK hold $13 trillion and $9.02 trillion, respectively.

External debt on India is only $614.9 billion, which is hardly 20 per cent of our GDP. America’s foreign debt is 102 per cent of its GDP, while that of England is 345 per cent.

History is witness that whenever there is turmoil in the world, the dollar gets stronger. This is because investors around the world believe that the US is the safest destination for them. This process is called ‘run for safe haven’ in business parlance. It is being said by market experts that since inflation is on rise across the world, worries about growth have increased and interest rates are also rising, hence the dollar is strengthening.

Dollar has risen by 10 per cent in the past one year and has reached an all-time high in 20 years. Countries, especially smaller ones, who have borrowed heavily, are finding it difficult to repay interest and principal. But countries producing oil and exporting countries or which are suppliers of agricultural commodities have more stable currencies. Russia’s ruble continues to get strengthened. The reason for this is the increasing export of oil and gas by Russia and the control on capital flows imposed by the Russian government.

The USD is strengthening due to global turmoil and rising interest rates in the US, but it may not last long. Such situations in the world are considered to be short-lived. In such a situation, when there will be an uptick in other currencies of the world and the investors who have deserted India in search of safe havens will again come back in search of markets, then a downfall of the dollar would be inevitable.

All the global institutions are expecting India to be the fastest growing economy in the world. Global investors will be compelled to turn to India. The ever-increasing foreign direct investment and strong fundamentals have the potential to propel the rupee towards strength.

(The author is a professor at DAV College, Delhi University)