By Shreya Bhargava
The Indian rupee has gone from 10 to a dollar in 1984 to 15 in 1989 to 30 in 1993 to 50 in 2006 to 39 in 2008 to 57.61 on Friday. India and Indians are getting poorer over time, in terms of foreign currency. Over the last few days, the term all-time low has lost its meaning, as rupee fell from 57.05 on Friday last week to 58.15 on Monday and then, to 58.39 on Tuesday and finally closed at 57.61 this week. The rupee has weakened by about 8% against the dollar since last month.
Reasons behind the fall:
The fiscal deficit and the trade gap, persistently high inflation, slowdown in growth of total factor productivity, fears about a reversal in capital flows, combined with a gold-buying binge by the Indians, has put the rupee under sustained pressure. FIIs (foreign institutional investors) inflows are abating and domestic mutual funds redemptions are continuing. Flow of money to the Indian equity markets is drying up. This may have fuelled the recent currency fluctuations.
The Good
Looking at the bright side, the falling rupee may get support from higher remittances from the Middle-East and exporters willing to sell receivables at the 58 level. A lower rupee makes imports more expensive, leading to a lower current account deficit. And the rupees slide could well reverse, making gold cheaper in the process. Pharmaceutical companies shall be the beneficiaries due to the rising prices of their exports. Many have sought to see a silver lining in the rupee weakness on the ground, that it improves competitiveness and thereby exports, but economists disagree due to the fact that price sensitivity of Indias export basket is very low and thus, rupees depreciation does very little in increasing exports.
The Bad
Weak demand conditions brought on by the devaluing rupee may force companies to absorb higher costs and hike prices. Prices of all imported goods such as tablets, cars, chocolates are set to rise due to costlier imported raw materials. This is going to adversely impact corporate profits. According to the Economic times, the 8% depreciation of rupee against the dollar in the past one month shall result in a 20-25% rise in prices of imported goods.
The Ugly
Institutions and individuals who borrowed foreign currency loans, the value of their repayment and interest payments is rising. For households, foreign travel and foreign education has become more expensive. The rupees weakness also took its toll on the stock markets as benchmark indices tumbled to their lowest close in nearly eight weeks. The Sensex shed 1.53%, or 298.07 points, at 19,143, its lowest close since 18 April on Friday. According to livemint.com, a falling rupee also makes oil imports costlier despite the international benchmark Brent crude remaining stable for some time. A Re1 depreciation increases the under-recovery (the losses on selling fuel below cost) bill by Rs.8,000 crore.
All in all, a weaker rupee will reignite inflation, stress corporate balance sheets and increase the budgets subsidy bill.
The rupee is not the only emerging market currency to lose value in recent weeks, as the US dollar has rallied. But, it is one of the most vulnerable currencies in its peer group.
The RBI finally decided to intervene in the rapidly falling rupee scene by selling about $200-300 million on Tuesday, last week. The current rupee downfall has a lot to do with global monetary gyrations. The trigger for the current INR depreciation was the repricing of EM assets in the wake of rising fears that the Fed might taper its asset purchase program sooner than presumed. Investors are anxious about the possible monetary tightening by the US Federal Reserve which shall be known only by June 19. Thus, Raghuram Rajan, chief economic advisor feels that the rupees downfall is transient. Both Raghuram Rajan and P Chidambaram have said that there are plans to float sovereign or NRI bonds and liberalise rules on FDI.
With gold import duty being risen from 6% to 8% and global risk aversion abating, the rupee may recover in the next few weeks. The RBI could help by intervening in the forex market like it did on Tuesday, last week. The RBI is unlikely to indulge in policy rate cuts in the policy review next week due to fear of triggering another bout of debt outflows and make it cheaper to shot the rupee. On Thursday, the ceiling on FII holding of government debt was increased by $5billion to $30 billion. This is unlikely to have any immediate impact because 20% of the original limit still lies unutilised.
Proactive steps by the government to strengthen the economy and boost capital inflows are the need of the hour. New Delhi should realize that its spendthrift ways have sparked off high inflation as well as pushed up the current account deficit into dangerous territory. The rupee is merely reacting to weak fundamentals. Politics over economics forever results in a bad economy as evidenced by the persistently indecisive Government.