This Friday (24/1/2014), the 20 emerging market currencies customized index by Bloomberg fell to 90, the lowest level since April 2009. The Turkish lira fell to a record 2.3029 to a dollar while Ukraines hryvniz bank to a four year low. The south African rand fell to a low of 11 to a dollar for the first time since 2008. Argentina policy makers devalued the peso by reducing support in the foreign exchange market allowing to drop the most in 12 years to an unprecedented low.
Society generale SA strategist commented and I quote “The current environment is potentially toxic for emerging markets…You have two very troubling things; uncertainty about the fed policy combined with concerns about growth particularly in China”. Developing nation currencies sold off after report from HSBC that China’s manufacturing may contract for the first time in six months. Currencies from commodity exporting countries that depend on Chinese demand sank with rand dropping 1.1 percent. Since last year Argentine peso has dropped 37 percent in value against dollar while Turkish lira dropped 23 percent in spite of intervention
The Indian rupee plunged sharply to close at 62.68 against the dollar from 61.93 on the 22/1/2014. The weak economic data from China seems to be a forewarning of what is to come. Indian foreign reserve fell by 1.20 billion dollars for the week ended Jan 17, 2014 to $ 292 billion. The Sensex also fell by 240 points. If and when the US tapering of QE3 starts to gain momentum, combined with the current global deflationary tendencies one should expect the rupee to continue weekening in the months to come. It will be no surprise if the rupee reverts back to the low it touched on Aug 28, 2013 (1 USD $ = 68.3 Rs.). Recently Indian banks raised 34 billion dollars in the overseas market which has added significantly to our external commercial borrowing (debt). Much remains to be seen as to whether our exports are going to pick up in FY 2013-14 we read news item that Sonia Gandhi is favoring removing restrictions on gold imports. If it happens our import bill will continue to climb up.
As for depreciation of currency is concerned India is not alone. But our position is somewhat scary with the threat from the rating agencies.