Rupee depreciation modest compared to emerging market currencies

NEW DELHI: The Indian rupee depreciated by 1.5 per cent against the US dollar month-on-month in May 2022 on the back of foreign portfolio equity outflows and a strong US dollar but the depreciation was rather modest relative to other major emerging market currencies, showed a report by the Reserve Bank of India For instance, the Turkish Lira depreciated the most ( -5.8%), followed by South Africa’s rand ( -.54).

Even Chese yuan depreciated 4.3 percent. The Russian rubble was the only currency that appreciated in the period, and that too by 22.6 percent. “The INR, despite depreciating against the US dollar, appreciated in terms of the 40-currency real effective exchange rate (REER) in the month of May due to higher depreciation of currencies of India’s major trading partners against the US dollar and relative price effect,” noted RBI in a report.

With an improvement in the economy and some degree of softening in inflation, the RBI believes that the country is better placed to avoid the pitfalls of stagflation. Stagflation refers to a situation where inflation and unemployment are high, while demand remains stagnant in the economy. India’s gross domestic product (GDP) growth for FY22 is estimated at 8.7%, which is above the pre-pandemic level. Retail inflation receded in May to 7.04%, but remained above the central bank’s upper tolerance limit.

“With most constituents of the GDP surpassing pre-pandemic levels, domestic economic activity is gaining strength. The inflation print for May has brought some relief as it recorded a decline after seven months of continuous rise,” the RBI said in the State of the Economy article authored by a team headed by deputy governor Michael Patra.