USD/INR: Indian Rupee graduates from ‘Fragile 5’: Nordea Markets

on Mar 20, 2014
Updated: Apr 9, 2020

**, Thursday 20 March:**

Last year, and more than a decade after Goldman Sachs declared Brazil, Russia, India and China (BRIC) as the emerging markets with the brightest economic growth prospects, Morgan Stanley identified the ‘Fragile Five” emerging market currencies. This group consists of those currencies that are thought to be the most vulnerable to the scaling back of US monetary stimulus, namely, the Turkish lira, the Brazilian real, the South African rand, the Indian rupee and the Indonesian rupiah.

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However, Nordea Markets emerging markets analyst Deanie M. H. Jensen and her colleagues believe the Indian rupee “has graduated from the group of five”. The chart below illustrates the rupee’s resilience against the dollar since the end of last year and the divergence of the USD/INR and the USD/TRY.
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The ‘Fragile Five’ were under intense pressure last summer amid widespread panic among emerging markets investors that the end of easy-money policies would expose economic flaws previously concealed by generous amounts of global liquidity. The five countries were highly dependent on fixed income inflows, according to Morgan Stanley, and they all shared high inflation, weakening growth, and above all ballooning current account deficits.

Nordea Markets’ Jensen opines that “the Indian authorities have taken crucial steps to improve the country’s external imbalances, which has effectively helped stabilize the INR”.

In fact, data released in the first week of March showed that the Indian current account deficit in the October-December quarter had narrowed to a four-year low at 0.9 percent of the country’s GDP, shrinking from the prior quarter’s $5.15 billion to $4.2 billion. For the period April to December, the deficit shrank to $31.1 billion, or 2.1 percent of GDP, compared with $69.8 billion or 5.2 percent of GDP a year ago. In addition, the Indian consumer price inflation for February decelerated to a 25-month low of 8.1 percent y/y, significantly below last November’s peak of 11.16 percent.

The rupee yesterday saw its steepest fall in nearly two months on concerns that the US central bank would raise interest rates sooner than expected
. The drop may have been amplified by the announcement of a further $10 billion reduction in the monthly pace of the Fed’s bond-buying programme, which brings it to $55 billion per month.
Nevertheless, the rupee has surged 12 percent since its all-time low against the US dollar in late August to a seven-month high this month on the back of the improving current account balance of Asia’s third-largest economy. The US dollar has today coughed up some of yesterday’s gains and the USD/INR is currently trading at around 61.295, down 0.2 percent intraday.


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