Collapsing Asian Currencies? Why is the Indian Rupee Depreciating?

• Collapsing Asian Currencies? Why is the Indian Rupee Depreciating? 
  by Kavaljit Singh, http://www.globalresearch.ca/
  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.
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  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. Except the Chinese Yuan and Bangladeshi Taka, most Asian currencies have witnessed sharp depreciation since the beginning of 2013.
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  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.
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  Over the past several months, India’s exports have considerably slowed down due to weak demand from traditional markets such as the US and Europe. While high imports of gold and crude oil have pushed country’s trade and current account deficits wider. The gold and silver imports were nearly $33 billion (bn) during January-May 2013.
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  From Capital Glut to Capital Flight
  There is ample reason for concern that capital outflows from India and other emerging markets will rapidly accelerate if the Federal Reserve decides to curtail its bond-buying program on September 17. This move would lead to higher interest rates in the US and investors may dump risky emerging markets assets in favor of safe havens.
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  Since the beginning of QE program, much of the money has leaked into emerging markets offering higher yields and better growth prospects. The emerging markets have been the biggest beneficiaries of Fed’s loose monetary policy, which has pumped extra liquidity since the global financial crisis of 2008. According to the IMF, emerging markets received nearly $4 trillion in capital flows from 2009 to early this year.
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  The investors borrowed cheap short-term money in the US and invested in higher yielding assets in India, Indonesia, South Africa and other emerging markets. This resulted in more money flowing into debt, equity and commodity markets in these countries. In India, many companies resorted to heavy borrowings overseas. The massive capital inflows also enabled India to comfortably finance its trade and current account deficits rather than addressing the structural aspects of CAD.
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  However, this money will quickly leave India and other emerging markets when the tapering of QE program begins. Already, emerging markets are witnessing a huge outflow of dollars as investors have started pulling money out of bond and equity markets. The foreign investors pulled out a record Rs.620 bn ($10 bn) from the Indian debt and equity markets during June-July 2013. If the Federal Reserve decides to taper the QE program, the liquidity withdrawal would continue to put pressure on the rupee over the next 12 to 18 months.
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