Why is the Indian Rupee Depreciating?

By Kavaljit Singh | Briefing Paper # 11 | September 2013

The Indian rupee touched a lifetime low of 68.85 against the US dollar on August 28, 2013. The rupee plunged by 3.7 percent on the day in its biggest single-day percentage fall in more than two decades. Since January 2013, the rupee has lost more than 20 percent of its value, the biggest loser among the Asian currencies. There is no denying that India is not the only emerging market experiencing a rapid decline in its currency’s value. Several emerging market currencies are also experiencing sharp depreciation over the prospect of imminent tapering of the US Federal Reserve’s policy of quantitative easing (QE) program. The South African rand and the Brazilian real touched four-year lows against the US dollar in June 2013.

Nevertheless, the Indian rupee has fared much worse than other emerging market currencies because of its twin deficits – current account and fiscal deficits. The foreign investors are particularly concerned over India’s bloated current account deficit (CAD) which surged to a record high of US$88.2 billion (4.8 percent of GDP) in 2012-13. Despite a modest recovery in the rupee’s value between September 4 and 12, the investors remain wary of India’s excessive dependence on volatile “hot money” flows to finance its current account deficit.