Currency: Decoded: Currency Volatility and Current Stock Market Development

Over the past few days, we have taken into account that the Indian Rupee (INR) has been depreciating sharply, reaching an all-time low of 82 per US dollar.

The depreciation of the rupee influences the national economy as well as the stock market. For an ordinary man, the national currency is a standard means of money to exchange goods and services, but the exact definition is elusive due to fluctuation in the value of currency.

For example, Rs 100 was enough to trade the standard quality of Basmati rice (1 kg) last year, but it is now expensive at Rs 120.

The durability and relative value of a currency fluctuates due to several factors such as: changes in the demand and supply of goods and services, changes in the cost of the economy, the rise and fall of interest rate cuts, fiscal policy, government anti-inflationary measures, and inflation.

Likewise, this is reflected in the value of the national currency in the global currency market. The currency exchange rate reveals the economic strengths and weaknesses of the nation.

It encompasses the country’s political stability, monetary policy and, most importantly, capital flows from exports, imports, FDI and FII.

As an emerging democratic economy, India has a floating exchange rate system where rates are market-based with minimal interference from the Reserve Bank of India (RBI).

Exceptionally, RBI interferes in the foreign exchange market to support the INR in the event of high volatility or during discrepancies in the availability of foreign exchange, which leads to a decline in foreign exchange reserves.

Foreign exchange reserves fell to USD 545 billion from a peak of USD 642 billion a year ago due to the sale of foreign exchange by RBI, high imports and outflows from FIIs.

The recent depreciation of the INR surprised the market, leading to a depreciation of 10% in one year, which is double the normal rate of 4-5% per year, which raises questions about the strength of the Indian economy.

However, it should be noted that the other top currencies in the world also depreciated sharply against the USD. Their cross currency movements are much weirder than INR.

For example, over the past year, the British pound has depreciated by 21%, the euro by 19%, the Japanese yen by 29% and the Chinese yuan by 10% (China has an ‘USD rather than a market). based).

This also means that the INR has actually appreciated against other currencies such as 10% for the pound, 8% for the euro, 15% for the yen and 0.4% for the yuan, in same time.

Therefore, we should not worry about the current volatility as it is due to global economic and geopolitical uncertainties.

As we discussed, India is in a safe position and its currency will rebound firmly as this volatility zone dissipates.

However, the current volatility is expected to persist in the near term as the global economy slows in 2022-23. The same will continue to affect the forex market due to plausible cross currency shifts to USD.

Today, the dollar is appreciating against the currencies of the rest of the world despite the fundamental weakness of its own national economy.

This is because the US economy consistently remains the largest and most powerful economy, with the advantage of serving as a reserve currency for global trade and investment.

Thus, the USD is considered the safe haven currency of the world. Persistent global uncertainties have led to a policy of risk aversion on the part of global investors.

This leads to selling off by foreign investors, which inherently increases the demand for US dollars and the supply of other currencies, leading to depreciation.

A reversal will be triggered when the dangerous factors are well priced in the stock market.

This may happen as early as the end of 2022 or be delayed until 2023, depending on the marked improvement in geopolitical risk, hyperinflation and global economic growth.

(The author is director of research at

)

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

About Ruben V. Albin

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