Why the Rupee has got hammered

By Akrita Reyar | Updated: Jun 27, 2013, 15:22 PM IST

Akrita Reyar

The whole of India can see it, but Chief Economic Advisor Raghuram Rajan would have us believe it otherwise.

The Indian Rupee has been in a downward spin for the last seven weeks, tumbling from about 53 to USD to approximately 60 per USD.

The fall does not seem a temporary one as global brokerage firm Standard Chartered has also now lowered its rupee forecast for the year end to 60.5 from 53. It cited the continuously strengthening US dollar, persistent outflows from Indian markets and low probability of strong policy measures to stem rupee’s falling value.

"INR losses pose significant downside risks to positive economic trends and in turn, portfolio flows. India`s unstable politics and slow pace of reforms add to the downside risks," the research note said.

But neither Raghuram Rajan nor Finance Minister P Chidambaram seems overly alarmed. And though they have both assured some measures to contain the loss, nothing substantial has been spelled out.

Of course, it is of little comfort that the real effective exchange rate is better than current value. Because the fact of the matter is that while the rupee sometimes recovers a little, it then settles at a new level which is normally lower than its last stable zone.

And this trend is likely to continue with little probability of the Rupee stabilising in the early 50s. The reasons for this are several.

First and foremost are home-made problems. The huge Current Account Deficit makes our currency one of the most vulnerable in the emerging market.

Any country that can’t manage its economy would face a problem such as this. The yawning CAD is in turn a by-product of our substantial oil import bill and India’s salivation for gold.

With the dollar gaining phenomenally, partially owing to the recovering US economy and withdrawal of stimulus or Quantitative Easing (QE), gold becomes cheaper and thus even more valuable as an investment.

Indians, for example, broke a record by registering a 100% increase in gold import in April-May alone!

And it doesn’t help that the China growth engine is slowing, thus easing pressure on the American dollar.

The stronger USD is also making investments in it more lucrative and we have seen a significant outflow of Foreign Institutional Investors (FIIs). This again has to do with the intrinsic weakness of our economy where foreign investment comes more in terms of short term FIIs than as long term commitments by way of Foreign Direct Investment (FDI). As a sample, foreign investors had pulled out $4.2 billion in first half of June itself.

Not only are students pursuing courses abroad or holiday makers keen to beat the North Indian heat facing the brunt of the falling rupee, the depreciating INR will in all certainty have a direct impact on citizens by way of higher prices in general, adding to inflationary woes.

It is possible that FIIs come back to India in medium term, but such investors are always whimsical and looking only for easy and optimum returns.

In such a scenario, it is fundamentals of the economy that need to be set right first. We need to encourage exports and SEZs, while finding imaginative ways to encourage FDI. We should alongside encourage diaspora to send back remittances, just like non-resident Chinese do.

Over and above, we must bring down CAD, with meaningful investments into finding alternative energy sources so as to bring relief on the oil import bill. And politically, we must avoid wasteful election sops that are more white elephants than purposeful social schemes.

But all these would need us to completely change the current Indian mentality as far as the economy is concerned. I have my doubts that this will happen.