The Indian rupee: the rising star of emerging currencies

India is the sixth largest world economy in terms of nominal GDP, and the third by purchasing power parity. Considered a newly industrialized economy, its fast growth has granted the country a leading position amongst the emerging economies and a seat at the G20, the group gathering the world’s major economies.The success of India is only comparable to that of China, yet probably with a brighter outlook. Indian economic growth averages a 7% yearly rate over the last 20 years, it has a young population, - 50% below the age of 25-, a solid savings/investment rate and a firm commitment towards liberalisation and globalisation. India is expected to become one of the top 3 economies in the next 10 years and the second largest economy by 2050.

A thriving services sector

India has transformed over the last 30 years from a predominantly agricultural country to a modern services economy.

The services sector grown at an average rate of 9% in the XXI century,- only shadowed by China’s 10,9% growth. In 2013-14 the sector accounted for 57% of the country’s GDP.Within the services sector, the IT industry has a leading position. India is one of the world’s major exporters of software services, -which account for 46% of all services exports- and business process outsourcing services.The agricultural sector although still important, -India ranks as the second world’s larger agricultural producer-, has been constantly reducing its weigh into the country’s GDP to 17.9% of the GDP in 2013-14.The industrial sector, which grew constantly until the 1990’s, has consolidated its weigh at 26-28% of the GDP over the last 20 years. The automobile sector stands out within Indian industry. India is one of the world’s largest automobile manufacturers, with an annual production of almost 24 mill. Vehicles in 2016

A growing player in international trade

India remained closed to international markets until the decade of the 1990’s. Foreign trade was restricted to protect the economy; imports were taxed and foreign investment was limited. As a result, capital inflows remained at minimal levels and exports were practically insignificant.In 1991 the Indian Government introduced a set of economic reforms opening the door to liberalisation and the value of international trade took up from 16% of the GDP in 1991 to 48% in 2015.

Today, India is a key player in international trade, accounting for 1.44% of exports of merchandise trade and 3.34% exports of commercial services. India is a major exporter of commodities like agricultural products, iron ore and other minerals; engineering goods, petroleum products, diamonds, textiles and garments. Its main trading partners are the EE.UU, the European Union, China and the United Arabian Emirates.

The Indian rupee

The Indian rupee is officially a free-floating currency although the Reserve Bank of India controls the exchange rate through open market operations; -buying and selling currencies in the FX markets-, and through regulations of capital flows in and out of the country. Properly speaking, we could consider the rupee as a managed floating currency.Until 1991, the rupee was pegged to a basket of the currencies of India´s major trading partners. However, the trade balance deficits coming from 1985 had dried up the FX reserves and set the country at the brink of default. Pressured by high inflation and large budget deficits, the Government was forced to devaluate the currency.In 1994 the rupee was made freely convertible for trading, but not for investment purposes. By the year 2000, the rupee had gone through a strong devaluation.From 2000 to 2007, the rupee started a stabilization and recovery period. The improvement of Indian economy attracted foreign investment into the country and the value of the rupee started to increase. This appreciation posed a dilemma for policymakers as a strong rupee would increase the prices of Indian products in overseas markets, thus hampering exports.

In 2008, the outbreak of the financial crisis froze the capital inflows, and triggered massive repatriations by foreign investors. The rupee depreciated almost 40% over the next 12 months.In 2013, the rupee devaluated again. Stagnant reforms in India and the announcement of U.S. Fed president Ben Bernanke about the plans to unwind the QE prompted foreign institutional investors to pull their cash from India, attracted by higher revenues in the U.S. The RBI’s attempts to stem the depreciation did not avoid a vicious circle of weaker rupee - higher deficit - weaker equity markets – more cash outflows, and the rupee depreciated another 30%.In 2015 and 2016, the rupee has been going through a steady declining trend, as the dollar appreciated in parallel with U.S. economic recovery. In the first half of 2017, however, INR has appreciated, as the dollar weakened with the U.S. economy giving signs of deceleration and growing political uncertainty.

Rupee restrictions

In order to maintain a certain stability in the exchange rate of the rupee, the Reserve Bank of India exerts a series of restrictions on rupee trading in foreign exchange markets:

• Rupee speculation is not permitted.
• In and out flows of foreign exchange funds are regulated by the RBI guidelines.
• Rupee payments to bank accounts outside of India are not permitted.
• There is not straight-through-processing (STP) in Indian banks for payments sent from overseas banks.
• Payments related to Foreign Direct Investment are only permitted for certain sectors and subject to compliance rules buy the RBI.

Conclusions

Despite the spectacular development of Indian economy, the Indian rupee is still far from being a convertible currency, and therefore its use in the international trade is limited.The rupee is very sensitive to the flows of foreign investment in India. Capital outflows in times of global economic contraction tend to have a deep impact on the exchange rate, with potentially disastrous consequences for the economy. To avoid that, the RBI exerts restrictions on rupee trading.To avoid returned payments and delays, most of the companies working with India tend to pay their suppliers in euro or dollar, which often involves a markup on the prices set by their Indian partners to cover themselves from exchange rate volatility.From now on, you will be able to pay in Indian rupee with Kantox. Simpler processing and the best international payments infrastructure to guarantee success.