What is the issue?
Many of the emerging market economies' currencies including that of India are weakening against the U.S. dollar.
What are the recent developments?
- The Indian rupee weakened past the 71 mark for the first time recently.
- It has registered a loss of about 10% of its value against the dollar since the year's beginning.
- This makes the rupee the worst-performing currency in Asia.
- Other emerging market currencies too have suffered much larger losses.
- They, notably, include the Turkish lira, the Argentine peso and the South African rand.
- The Argentine peso has lost more than half of its value in 2018.
- It witnessed a sharp loss of more than 10% on a single day.
- This happened despite a 15 percentage point increase in interest rates by Argentina’s central bank.
- It was an effort to stem the outflow of capital and shore up the value of the currency.
What are the causes?
- External - A common factor is the increasing demand for the dollar across the globe.
- The U.S. Federal Reserve raised the interest rates earlier this year (2018).
- The resultant tightening of liquidity in the West has played a major role in strengthening of the dollar.
- Emerging market countries earlier benefited from the West's easing of monetary conditions.
- These are now facing the impact of a return to the West's tight monetary policy.
- Investors who earlier put their money in emerging markets have recently preferred American assets.
- As, this has become more attractive now yielding higher returns. Click here to know more.
- Domestic - Emerging market economies cannot simply blame external economic factors.
- The management of these economies has generally been far from ideal.
- This is particularly true when it comes to hard-hit economies like Turkey and Argentina.
- A key trouble of emerging market economies is the higher domestic inflation in relation to the economies in the West.
- So it is natural that their currencies slide in value over time against the dollar and other major Western currencies.
What is the way forward?
- Shift of capital across the globe due to interest rates variations is normal.
- There is need for a drastic change in emerging markets' monetary policy as against that of the West.
- The role of emerging markets' central banks in the current scenario is crucial.
- Their mandate should be to let their currencies find their true value in a smooth manner.
Source: The Hindu
