Indian Rupee: The Great Fall

Akrita Reyar

The Indian Rupee is the new humpty dumpty. From about 44 Vs the dollar to below Rs 55 Vs 1 USD, it’s been in a free fall mode for the past couple of years. The rather late and limited RBI intervention has had virtually no effect to stall the spiral downwards.

Morose figures like 5.3% Q4 growth rates – the poorest quarterly show in nine years – have only further sullied business sentiments and the stock market.

Top that with FII pullouts, a paralysis-hit government and slowing manufacturing sector, you have a cocktail for a possible slowdown encore.

While the West still struggles with contraction or speckle growths, India can no longer be smug in the belief that it is a part of the booming developing countries club whose financial adrenaline will keep pumping, whatever may happen in the other crust of the world.

Our currency was weak in the first place. Compare it with the Chinese Yuan, Brazilian Real, South African Rand and you’ll know what I mean. Even countries like Uruguay, Ukraine and Tunisia do better.

A common man needs only to step out of the country to absorb the full impact of the flagging Rupee. The money that he earns is not only buying the Indian less in India – thanks to the zooming inflation and fuel prices – the Rupee’s value also gets shrunk further abroad. If one were to start converting everything that one buys on foreign shores, the pinch bites a lot more.

Pre-Independence, the Rupee had been kept artificially high by the British to squeeze out high remittances, but subsequent economic woes diluted its worth. The currency was first devalued in 1966 when foreign aid to India was slashed and deficit yawned. In 1991, for Dr Manmohan Singh, it was once again more of a compulsion. The economic situation was on a do-or-die cliff.

Two decades later the story is different. Or is it?

The Indian economy and its currency in a more liberalised environment and an integrated globe get affected by negative international factors. The Eurozone crisis, for example, has made the dollar more sought after and thus more valuable.

But the blame is, in large parts, ours.

Our unacceptably high subsidy bill has led to incongruously high current account and fiscal deficits. Mindless spending – whether by an individual or the government - needs more money than is being generated through work or as revenues.

The government’s flip flop on policy whether by reversing decision of FDI in retail or the Supreme Court’s cancellation of telecom licences, have all dampened investor enthusiasm. Not just foreigners, Indian businessmen are also looking at alternative investment opportunities abroad where government policy is more stable and returns more assured.

Our spending through dollars on imports is not matched by its equal or larger injection by way of investment. Besides, overseas borrowings by Indian businessmen have been putting more pressure on the Rupee.

The problem is clearly that of the weak macro fundamentals and mismanagement of the economy.

With the best economist of the country as the Prime Minister, that’s a shame. The compulsion of coalition or populist politics must not make a sensible man give up his enlightened sensibility.

As they say, we need to define where the buck stops. Literally and figuratively.