Should We Really Be Surprised At The Downfall Of The Rupee?

Posted on September 2, 2013 in Business and Economy

By Shanthi Sara Cheriyan:

Over the past two weeks, India has been witnessing a major downfall of Indian rupee against the US dollar. Oil and petrol prices have been rising, food inflation continues to rise. But this is not something that happened in a fortnight. What are the reasons that resulted in the fall of rupee? Why didn’t the government and the economists foresee this sudden depreciation in the rupee value? Why are the government and the RBI not able to bring about the efficient measures to tackle the downfall? All these have been lingering in the common man’s mind for quite some time now, but unfortunately, our Prime Minister and Finance Minister have failed to give satisfying answers that can reassure the people that being patient would actually better the situation.

Rupee

Much of the weakening of rupee is attributed to the negativity in the market. The various steps taken by the government and RBI to promote development,  increasing the FDI limits and purchasing governments bonds seem to have little or no effect on the market confidence. Foreign investors seem reluctant to invest in India due to its well known red-tape delays and corruption. Add to that the declining growth rate for past couple of years and the increase in imports, it is a surprise that many people are shocked at the inevitable decline of rupee.

India’s fiscal deficit has been lingering around 5% of GDP for quite some time. And it doesn’t look like it will come down anytime soon. A major chunk of government’s income goes towards subsidies. India subsidizes diesel, LPG, fertilizers for farmers and essential food grains through the PDS. But with the corrupt systems in place, a lot of these subsidies don’t reach the intended recipients. Furthermore, the new Food Security bill is sure to increase the subsidy bill a lot more. Meanwhile, it is calculated that less than 3% of Indian citizens pay tax, something which should be the major income source for the government.

India imports a lot of essential and non-essential goods like petroleum products, jewelry, chemicals, vehicles and machinery. Recently, the imports have increased tremendously, especially in petroleum and gold, while the exports seem to grow at a slower rate. This has adversely affected the current account deficit and has resulted in a vicious cycle wherein imports affect the value of rupee adversely which in turn increases the import bill. Government has tried short term solutions by increasing the duty on gold imports, letting oil companies buy dollar directly from RBI, but they should be looking towards long term stable reduction of CAD. This can be achieved to a great extent by focusing on improving the exports. The government should focus on better trade agreements and creation of trade routes with other nations.

The current level of Indian Rupee at 67-68 to a dollar is said to be below its equilibrium value and that rupee is undervalued. That can be partly attributed to the extra demand for dollar as month approaches its end and oil companies settle their bills. With general elections due early next year, the uncertainty over next government also affects the market.

So, what can the government and RBI do to definitively put a hold to this rupee decline and bring back the growth? Well, I am no more a financial expert than you are. But let’s just hope those in power, including the newly appointed RBI Governor, Raghuram Rajan, who is widely respected in the financial field, find ways to tackle this issue and help raise India back to a blooming economy. Else, I fear, we will forever remain a developing nation.

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