A🧵on ₹ depreciation. See chart below. where ALL currencies have depreciated more year-to-date against the USD than ₹. While ₹ has depreciated 8% year-to-date, $ index has appreciated 18.8% over the same period. 1/n
Two key questions arise: 1) Why is $ appreciating? 2) How should we see ₹ performance vis-à-vis other currencies? 2/n
Q1: Why is $ appreciating? Combination of i) "flight to safety" where U.S. is considered safe destination by investors; ii) "home bias" with U.S. being home for majority of investors; & iii) $ yields ↑ & expected to ↑ more bcos of monetary tightening by the Fed. 3/n
Q2: How should we see ₹ performance vis-à-vis other currencies? ₹ depreciation is less than all other currencies bcos of our stronger macro-fundamentals. This is also evidenced in significant FPI inflows since July with Aug inflow being highest in 20 months. 4/n
In terms of my expectation, I do not expect the $ strengthening to reverse any time soon. While the US economy is not doing well, asset markets will do well in the U.S. In fact, there may be a bubble building up in US asset markets. 5/n
Look at seasonally adjusted M2, July-22 is 5% higher than July-21 (👉 federalreserve.gov). Compared to pre-Covid, M2 is still ~40% higher. As this money is going into asset markets & economy is in recession, wedge b/w real economy & money supply is growing wider. 6/n
So with this kind of wedge, I fear an asset bubble building up in the US. For the next few months at least, till uncertainty about Russia-Ukraine war doesn't subside, this bubble will grow from flight to safety + home bias + higher $ yield. 7/n
Once Russia-Ukraine war uncertainty subsides, I expect the extraordinary amounts of money flowing into the U.S. to stop. That's when I think $ appreciation will stabilize. Till then, all other currencies will depreciate, with ₹ depreciating less than other currencies. End of🧵
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