The Bhutanese Leading the way.
The Indian Rupee (INR) has been depreciating against US Dollars (USD) and with Bhutanese Ngultrum (Nu) pegged with INR, the Nu has been depreciating too. 1 USD is equal to Nu. 82.50 currently.
This will impact the country’s economy in terms of loan repayment, foreign reserves and inflation.
Bhutanese Ngultrum (Nu) has always been pegged to Indian Rupee (INR). The traditional pegged exchange rate system has benefitted the country’s economic interests and trade facilitation given its geographic closeness to and tight economic and financial integration with India.
This structure has protected the nation from the effects of foreign economic uncertainty, anchored price stability, fostered commerce and investment, and strengthened political bonds. Additionally, the free conversion of INR to Nu has reduced transaction costs for businesses by eliminating currency volatility and boosted the confidence of the Nu.
However, since Bhutan’s exchange rate is tied to that of India, any change in the exchange rate has an impact on trade and investment, debt obligations, and the value of local currency.
According to the RMA’s annual report, the surge in global oil prices, higher inflationary pressure and outflow of US dollar from Indian market due to rise in US short-term yields are some of the main causes of INR depreciation. For instance, more than 85 percent of India’s energy requirement depends on crude oil imports. As such, demand for the US Dollar to import crude oil increases, resulting in the depreciation of INR.
Accordingly, India has been experiencing a fall in foreign exchange reserve due to rising trade deficits on account of surge in global oil prices and merchandise imports.
There has been capital outflows from the Indian foreign currency market as a result of the US Fed’s hike in key interest rates to curb inflation.
As such, the INR has fallen around 10% against the dollar and as a pegged currency, same can be said with the Nu.
According to economist, Sanjeev Mehta, there are multiple impacts of appreciating USD. “First and foremost, the imports are becoming more expensive which exacerbates balance of payment crisis. The debt servicing for third country debt would require larger domestic resources leaving little less for government spending.”
In addition, he also shared that foreign reserves would also deplete faster as the import bill would rise without parallel increase in exports.
Currently, Bhutan has enough reserves to last for 14 months for essential items imports.
He also added that appreciation means more inflation. Currently, the inflation is at 4.44%.
According to an article published by Anuj Choudhary who is a research analyst, he predicts the INR to trade between 80 and 85 rupees to the dollar in 2023, with potential for further depreciation in the first half of the year.
