On 22 August, the Indian rupee (INR)
breached 65 to a US dollar (USD). To be fair, it was
an intra-day break with the INR recovering to rise
above the rate; but it sent shivers down every
spine, and was followed by the next day’s screaming
headlines with doomsday prophets speaking of the INR
Simultaneously, a tiny group of commentators tried
to soothe sentiments. The finance minister, P.
Chidambaram, spoke of how this was affecting every
emerging market; that we will see more reforms to
overcome the slide; that we shouldn’t panic; and
that the INR was bound to recover. As the finance
minister and probably the only one in his party to
have sleepless nights about the nose-diving rupee,
he had to make the right noises. There were a few
others, such as Mihir Sharma of the Business
Standard who called it “A Pointless Panic” with his
basic text being, “Regardless of what you're told,
this is not a 'home-grown crisis' — it is a
pan-emerging market problem”.
The advocates of a ‘pan-emerging market problem’ are
right insofar as all emerging markets but China have
been affected. But they are wrong in that some have
been hit far more than others. The table
accompanying this article shows it quite clearly.
The data are culled from the daily closing exchange
rates between 2 July and 22 August 2013. I have
arranged the currencies into six groups. The first
involve the INR, the Brazilian real and the
Indonesian rupiah, which have depreciated the most
since 2 July 2013. This is followed by the South
African rand. Then the Thai baht. Then come the
Philippine and Mexican pesos. Followed by the ruble.
And finally the Chinese yuan, which has remained
The point of this table is to underline the fact
that three emerging market currencies have slid far
more than others — not only from early July, but
across each time span given the table. The
difference is not marginal. It is significant. Those
trading in the foreign currency market seem to
believe that while all emerging markets barring
China are worrisome, three are clearly children of
significant lesser Gods. Why so?
Table: Currencies versus the USD as on 22 August
Depreciated by INR BRL IDR ZAR THB PHP MXN RUB CNY
Last 5 days -4.9% -4.3% -4.6% -3.0% -2.3% -0.8%
-2.5% -0.2% -0.2%
Last 10 days -6.0% -7.0% -5.5% -4.6% -2.7% -1.5%
-4.1% -0.7% 0.0%
Last 15 days -5.8% -6.1% -5.1% -3.7% -2.1% -1.5%
-2.3% -0.1% 0.1%
Last 20 days -8.4% -8.5% -5.0% -5.3% -3.2% -2.1%
-3.9% -1.8% 0.2%
From 2 July 2013 -7.8% -8.5% -8.3% -3.7% -3.3% -1.9%
-1.3% 0.1% 0.2%
Notes: BRL = Brazilian real. IDR = Indonesian rupiah.
ZAR = South African rand. THB = Thai baht. PHP =
Philippine peso. MXN = Mexican peso. RUB = Russian
ruble. CNY = Chinese yuan. Source: Pacific Exchange
Rate Service, University of Vancouver.
Let me hazard a hypothesis. All three are large
economies having a few disturbingly common features.
The first is inflation. Consumer price inflation for
India is running at 9.6%; for Brazil at 6.3%; and
for Indonesia at 8.6%. These are high by any
yardstick. The second is the fiscal deficit as a
share of GDP. For India, the estimated deficit for
2013 is 5.1%; for Brazil it is 3.1%; and for
Indonesia it is 2.9%. In India’s case, the
additional worry is if the fiscally disastrous Food
Security Bill becomes law, for it will certainly
bankrupt the exchequer in no uncertain terms. The
third is the current account deficit. For India, it
is estimated to be running at around 4.5% of GDP for
2013, especially on account of oil imports in a
hugely devalued environment. For Brazil it is 3.2%.
And for Indonesia, despite coal exports, it is
expected to be 2.4%.
Arguably, by these canons, there ought to have been
a fourth to accompany the unholy threesome — South
Africa. But somehow, while the ZAR has depreciated
quite a bit, it hasn’t been as bad as what has
befallen the triad.
Therefore, while accepting that emerging market
skittishness is across the board, let us recognise
that some nations have been hit more than others.
So, focus on reforms to get out of the mess — not
knee-jerk commands and controls.
Published: Business World, September 2013