Covid Crisis: Falling Rupee Spells Trouble For Corporates

Flight of footloose portfolio capital from India is under scrutiny due to its impact on stock indices and the rupee value. But the bigger danger is of a debt shock to the corporate sector

- CP Chandrasekhar & Jayati Ghosh

One of the many symptoms of the economic shock resulting from the COVID-19 pandemic is a sharp depreciation of the Indian rupee vis-à-vis the dollar. The value of the rupee fell from 71.3 to the dollar on February 12 to 76.2 to the dollar on March 24 — or by close to 7 per cent in 1.5 months, with much of the fall occurring over the month ending March 24 (Chart 1).

There is little disagreement that this downward drift was the result of the exit of portfolio capital from India, since depressed domestic demand and falling international prices for commodities such as oil should have reduced demand for foreign currency and held up the rupee.

India’s predicament reflects a tendency seen across emerging markets, but there are India-specific features that are troubling. By March this year, when the coronavirus pandemic had overwhelmed Europe, UK and the US, the effect on financial markets was visible. Not only were stock indices collapsing across the world, but there were signs of a flight of capital out of emerging markets. In periods of uncertainty financial investors pull out of investments, either to cut losses or book profits to cover losses elsewhere.

And, with globalisation, those decisions are felt with force across the globe, including in the developing countries.

Capital reversal

Estimates from the Institute of International Finance, cited by the Financial Times, place the volume of capital withdrawn from emerging market financial assets since January 21 at $95 billion, which is four times as much as the capital flight experienced over a similar period after the onset of the 2008 crisis.