The year, 2013, was marked with numerous record lows for the Indian currency, mainly in the second half, due to factors that were both domestic and global.
The currency closed the year 12.4% lower against the dollar, the third year of depreciation in a row.
Among Asian currencies, rupee’s performance was only better than the Japanese yen and the Indonesian rupiah that fell by 17.4% and 19.5% respectively. Rupee was also one of the worst performers among emerging markets currencies like Argentine peso — falling the most by 24.6%- followed by South African rand, Brazilian real and the Turkish lira.
While first four months saw rupee trading in a tight range of 53-55 to the dollar, the currency fell 5-8% per month between May and August. The rupee was at a record low of 68.80 on August 28.
The year also kept the country’s central bank on its toes. The Reserve Bank of India (RBI) net sold $9.4 billion in ten months of 2013 (data of last two months yet to be released). The RBI sold dollars worth $13.3 billion, which could be the highest foreign exchange intervention ever, to stop the rupee from sliding further. The central bank also purchased $5.3 billion in better times to shore up the foreign exchange reserves. In 2012, the RBI net sold $8.3 billion in the spot foreign exchange market.
Going forward, the prospect for rupee is not all that bleak. Two biggest threats—weak current account deficit and the impact of US Fed tapering its bond buying— seem to be under control. The Fed deferred the tapering to January 2014 much against expectations of beginning in the second half of 2013.
“India utilised the delay in tapering to bring about adjustment in the current account deficit
(CAD) and built buffers by replenishing its foreign exchange reserves,” said RBI in its Financial Stability Report. With the help of various measures and incentives, the central bank was able to attract $34 billion of foreign exchange in three months. CAD also fell to 1.2% of GDP at the end of September 2013 from 5% a year ago.
“Consequently, external sector risks have been considerably reduced and the effect of tapering on the economy is expected to be limited and short-lived,” said RBI in the report.