After being stable for two successive years, -2014 and 2015, chances are bright that the rupee may remain continue its bright run in 2016 as well.
In 2015, the domestic currency lost only five percent against the US Dollar. This was after a stable performance in 2014 where it lost only two percent.
The rupee’s stable performance during the last two years was remarkable in the context of continuing turbulence in the global economy. Other emerging market peers except the Chinese Yuan lost significant values during 2015. Currencies of Indonesia, Brazil and Russia have undergone steep depreciation over the last two years.
The Chinese currency which was included in the SDR basket of the IMF remained stable amidst last ‘stock market crash and slow down of the economy.
Looking for 2016, most of the factors that kept the rupee stable can be operative in the coming year as well.
There are two important reasons why the domestic currency performed better after the May 2013 Fed QE exit havoc.
First is the declining trade deficit. Import burden has come down as a result of the steep fall in oil prices. Crude imports constituted to one third of India’s import bill.
The lower trade deficit has enabled the country to narrow down the current account deficit as well.
Second, is the stable flows in the capital account. Strong capital inflows into the government securities market have created a new momentum in the last few years. Continuous warning by the US Fed about its QE exit has helped to well adjust to a shock and avoid sudden capital outflows during December last year.
Both these positive factors will remain in 2016 as well. Early trade data indicate that imports are coming sharply compared to exports. Similarly, favorable macroeconomic sentiment may attract capital flows to India in the coming quarters as well.