The main reasons for the rupee’s better performance overall are the country’s 2016-adopted framework for a nominal policy anchor through a monetary policy committee (MPC) and the availability of a large cache of forex reserves (now about $600 billion) to help stabilize the currency in times of stress. Given that this incorporates two taper tantrums, this performance is better than usual for India and better than average for emerging markets. The Indian rupee has depreciated at about 3% a year relative to the dollar over the past 10 years. These countries have inflation rates in triple digits with sharply depreciating currencies. Turkey is at risk of joining a club with Venezuela, Sudan and Lebanon. Turkish inflation now is an annual 79%, mostly due the lack of a credible monetary response exacerbated by the rising dollar. The Turkish Lira has lost 23% this year on top of a 44% loss last year. This first tranche of an overall $7 billion package will mark a revival of the 22nd such IMF deal for Islamabad. The dollar’s relentless rise has broken the back of the Sri Lankan economy and is likely to accelerate a $1.17 billion International Monetary Fund (IMF) bail-out deal for Pakistan. Of course, at that time inflation was not as much of a threat, so the possibility of large rate rises was limited.
This could be called Taper Tantrum 2.0, following a similar period in 2013. The Indian rupee is down about 7% for the year, the Pakistani and Sri Lankan rupees have declined precipitously, and even a commodity-propped currency like the Brazilian real has depreciated by about 13% in the last two months. Asian currencies registered their worst quarter since the Asian crisis of 1997.
With the world’s big four central banks out of sync in terms of speed and direction, global currency markets are being roiled. It has signalled that it will likely ask lenders to hold more in risk-weighted assets, a so called “counter cyclical buffer". Reflecting the UK’s particularly fragile relationship between higher rates and slower growth, the BoE warned British banks to shore up their capital base. The Bank of England (BoE) has already raised rates five times this year. The Bank of Japan is reluctant to jeopardize that goal in its response to current threats. In the context of today’s global inflation, Japan has been working to create modest, sustainable inflation over the last three decades. Along with interest rate differentials, this has meant that the yen has declined to its lowest level in 24 years against the dollar. Japan’s central bank has categorically stated that it will not raise rates or engage in quantitative tightening.
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