• 2024-09-02
• News

"India's Rupee: World's Most Stable Currency with Under 2% Annual Depreciation"

Asian currencies have recently been "massacred" by the US dollar, with many sovereign nations' legal tenders experiencing severe devaluation.

The Japanese yen, the fourth-largest economy in the world and an SDR-weighted currency, was hit the hardest. Just a few days ago, it plummeted to a low of around 160, nearly a 20% devaluation from 135 a year ago. This forced the Bank of Japan to break its silence and secretly intervene, temporarily bringing the yen back to around 155.

Vietnam, an emerging economy under global scrutiny, was not spared. From 23,470 Vietnamese dong per US dollar last May to 25,455 now, it has depreciated by 7.3%. Although it seems better than the yen, the depreciation in the last three months alone has exceeded the cumulative devaluation of the previous nine months, reaching 4.5%. At this rate, the annual depreciation rate is approximately 18%.

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In contrast, the Chinese yuan has remained relatively strong under the "assault" of the strong US dollar. A year ago, the offshore yuan exchange rate was around 6.95, and the latest data shows it at around 7.23, a depreciation of 4%.

Surprisingly, another emerging economy, India, has seen its legal tender, the rupee, hold its ground even more firmly, almost unaffected by the US dollar's appreciation. On May 1, 2023, one US dollar could be exchanged for 82 rupees, and now it can only be exchanged for 83.5 rupees, a mere 1.82% devaluation. If we shorten the period to start from last August, the rupee has hardly depreciated against the US dollar.

Isn't that astonishing? The rupee has almost no presence globally, yet it remains exceptionally strong. What's going on here?

Before explaining this, let's普及 some knowledge about exchange rates.

Exchange rates are divided into two main categories: fixed exchange rates and floating exchange rates. For currencies with fixed exchange rates, there is no concept of appreciation or devaluation because they are fully pegged to the US dollar, always exchanging at a specific value or within a very narrow range.

For example, the Hong Kong dollar is a classic fixed exchange rate currency. The Hong Kong government promises that at any time, one US dollar can be exchanged for 7.75 to 7.85 Hong Kong dollars, and most of the time, the exchange rate of the Hong Kong dollar is around 7.8.

Fixed exchange rates have their pros and cons, which are not elaborated on in this article. What needs to be clear is that a fixed exchange rate is equivalent to acknowledging that the government controls the exchange rate, which is not a big deal as long as it is stated upfront. Is the rupee like the Hong Kong dollar with a fixed exchange rate? No, it is not. However, the Indian government may be practicing strong intervention under the guise of a floating exchange rate, similar to a fixed exchange rate.In December last year, the International Monetary Fund (IMF) had a special "dispute" with the Indian government over this matter. The IMF believes that the Indian government has excessively intervened in the foreign exchange market, personally selling a large amount of US dollars to stabilize the rupee exchange rate, turning the floating exchange rate into a fixed one. As a result, the IMF adjusted India's actual exchange rate regime from "floating" to "stabilization arrangement", just one step away from directly defining it as a fixed exchange rate.

India, of course, does not buy it, and has a lot of reasons, the main point is that there is no excessive intervention, and it does not admit that it is a national control of the exchange rate.

Is there really excessive intervention in the foreign exchange market?

I think "seeing is believing," and the performance of the rupee can already explain a lot. From June 2021 to October 2022, the rupee experienced a significant devaluation, and then it began to "solidify", which is obviously not reasonable. India's financial strength and the degree of pursuit of the rupee obviously have not changed much, and the GDP growth rate in 2023 is roughly the same as in the previous two years, and there is no qualitative improvement.

It is obviously unconvincing to say that the Reserve Bank of India has not excessively intervened in the foreign exchange market.

In addition, India is currently in a stage where it urgently needs foreign investment, and a stable exchange rate is useful for attracting foreign investment because small fluctuations in the exchange rate will make it easier for investors to predict returns and reduce the risks caused by foreign exchange fluctuations, thereby making investment easier. India needs foreign investment, and foreign capital does not like the exchange rate to fluctuate up and down, so India has the motive to "control" the exchange rate.

This logic is theoretically valid, but there is a problem in practice, that is, intervening in the exchange rate under the backdrop of the continuous appreciation of the US dollar requires "real money", that is, it must continuously sell US dollars and buy rupees. India is not like China, which has a very large trade deficit, where does it get US dollars to stabilize the rupee exchange rate?

The answer is to use other people's money. Hasn't India attracted a lot of foreign capital? Foreign capital comes to India with foreign currency for investment and has to find Indian banks to exchange foreign currency for rupees. India has accumulated a large amount of foreign exchange in this process, and the Reserve Bank of India uses other people's money to intervene in the foreign exchange market to attract more foreign capital. The closed loop is formed in this way, but it looks a bit like a Ponzi scheme.

You should have also heard that India often traps foreign companies' money, right? Whether it's Chinese companies or American companies, they have all suffered losses in India. What the Indian government wants is for India to earn money and spend it in India, and not a penny should be taken home. You can invest and consume with rupees domestically in India, but it's not that easy to convert it into foreign exchange and transfer it out. First, check if there are any "illegal and irregular" situations, whether it meets the conditions for transferring out, and then go through a long process. After going through the "eighty-one difficulties", you may only take away a part of the foreign exchange.

In short, India needs foreign investment, attracts foreign investment with a stable exchange rate, and then uses the attracted foreign investment to intervene in the foreign exchange market to form a stable exchange rate. I don't know who the smart guy is who designed such a game for India, focusing on getting something for nothing.Finally, I would like to say that shamelessness should be India's secret weapon in making the rupee the most resilient currency in the world. Do you think that's the case?

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