The former Chief Economic Advisor K Subramanian said on Monday that the US dollar is on the march, putting pressure on other currencies, including the rupee which has now crossed the 81 mark. He said that the Indian currency did not do badly compared to other currencies.
The former advisor cited as the reason for the sharp rise in the dollar are flight to safety, home bias and rising dollar yields.
The former CEA said in a series of tweets that ii flight to safety is a safe destination for investors, iii home bias with the US being home for the majority of investors and iii dollar yields are rising and are expected to rise more because of monetary tightening by the Federal Reserve, the central bank of the US.
The Indian rupee was hovering around 80 for quite some time, but as the US Fed hiked its policy rate by another 75 basis points in its attempt to fight inflation, the currency fell further and is currently at an all-time low of over Rs 81.
Subramanian, who served as the CEA from 2018 to 2021, said today that the rupee's depreciation is less than all other currencies because of our stronger macro-fundamentals. The August inflow of FPI has been the highest in 20 months, with August inflow being the highest in July. He said that all the currencies have depreciated more year-to-date against the USD than the rupee. The dollar index appreciated 18.8% over the same period, while the rupee has depreciated 8% year-to-date.
The former advisor does not believe that the dollar's strength will reverse any time soon. While the US economy is not doing well, he said the asset markets will do well in America. He said there may be a bubble building up in the US asset markets.
The M 2 seasonally adjusted measure of the money supply is 5% higher than July 22. M 2 is still 40% higher than pre-Covid. The real economy and money supply are getting wider as the money is going into asset markets and the economy is in recession, he said.
He said that there was a fear that an asset bubble is building up in the US. The bubble will grow from flight to safety to home bias and higher dollar yield for the next few months as uncertainty about the Russia-Ukraine war doesn't subside, according to the former advisor.
He expects that the extraordinary amounts of money flowing into the US will stop and that's when the dollar appreciation will stabilize after the war uncertainty subsides. He said that all other currencies will depreciate, with the rupee depreciating less than other currencies.
Subramanian has now been appointed Executive Director for India at the International Monetary Fund.