The pandemic-induced slowdown is the first time the Indian currency has not depreciated in a crisis
Image: Shutterstock In 2008, during the global financial crisis, the Indian rupee depreciated by 25 percent in six weeks. Capital flows had been hit and exports were down. The US dollar reigned, and gold rallied as a safe asset. The net result was a 25 percent depreciation from Rs40 to the dollar to Rs50 at the end of 2008. The intervening years have seen the rupee lose its value against a host of currencies (it moved from Rs50 to Rs75 to the US dollar between 2010 and 2020). High oil prices in the early part of the decade were to blame, as was a tightening in US interest rates—the US Federal Reserve signalled intentions to hike rates too. But at the same time the rupee held its own against emerging market competitors—its BRIC counterparts, Brazil, South Africa and Russia, whose economies are built on commodity exports. But as India entered the Covid-19 crisis, the previous depreciation playbook did not kick in. A host of factors resulted in the rupee holding its own against the dollar. From January, it has seen a mere 2.8 percent depreciation to Rs73.5 to the dollar. While this is equally on account of the dollar’s weakness, it also points to an emerging strength in the rupee, which should stand us in good stead in the years to come. The flipside is a strong currency being bad for exports—in particular, textiles, gems and jewellery, where countries typically lack pricing power. (IT exports are less price sensitive.) Dollar Weakness One clear plus point of the Covid-19 crisis was the fact that global central banks reacted early and decisively. This helped in stabilising financial markets and also gave investors the confidence that the government had their back. With a ready blueprint—interest rates cut, swap lines with other central banks set up—global central banks knew what they had to do. But the key difference this time is the average inflation target that the US Federal Reserve has adopted. “That is a game changer as they are signalling low interest rates and an expanding balance sheet for a long time,” says Anindya Banerjee, vice president (interest rates and currency derivatives research) - PCG, Kotak Securities.