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Fall of Rupee is an international conspiracy

9/17/2013 1:32:02 PM

The problem in the Indian economy is man-made

By Dr. Bilva Mangal

The fall of Indian Currency Rupee is a big national and international conspiracy. It is nothing else but passing the buck of all the evils of European and American economy to a country like India which is internally very strong so far as economics is concerned. The problems in the Indian economy is man-made.

After liberalization in 1991, one can see the Indian currency going to the dogs and US Dollar becoming strong inspite of the blunders taking place in US Economy. When liberalization was started, the dollar was against the Indian Rupee at 17-18. In those days, banana was available in Indian Market at the rate of Rupees Three per dozen. Today, it is around Rupees Forty to Forty Five per dozen. It is really a miracle !!

One can see that nothing has changed in US Economy and still dollar has become very strong while in the case of Indian currency, it is becoming weaker and weaker thanks to the very, very weak political leadership.

The fall of rupee vs. Dollar has created the same conundrum what the rupee appreciation caused in year 2007. However, the impact has reversed this time with exporters making appreciated revenues and the importers feeling the heat. The increased demand for dollars vis-à-vis the India rupee has led to a sharp depreciation with rupee falling close to 13% from the April 2013 levels, and hitting an all time low of 61.21/USD on 9th July 2013, making it the worst performing Asian currency of the year.

Taking a closer look at these issues, the fall in rupee can be attributed primarily to 3 broad factors.

Basic reasons for fall of Rupee:

1. European debt crisis
2. Speculations prevailing in the market
3. Shiftiing of Foreign institutional investors (FII)

First, the grim global economic outlook, essentially due to the European debt crisis. Due to turbulence in European markets, investors are considering dollars as a safe haven for their investments in the longer run. This led to an increased demand for dollars vis-à-vis the supply for rupee and thus the depreciation. Another line of thought could be that while investors are shifting from European markets, why are they not investing in the Indian markets?  The Indian economic scenario for the last 12 months has been plagued by high rate of inflation, hovering above 10%, and extremely low growth in manufacturing sector. The cumulative effect of these factors is leading to a shift in investor sentiments towards dollar market.

Second, the fall in rupee can be largely attributed to the speculations prevailing in the markets. Due to a sharp increase in the dollar rates, importers suddenly started gasping for dollars in order to hedge their position, which led to an increased demand for dollars. On the other hand exporters kept on holding their dollar reserves, speculating that the rupee will fall further in future. This interplay between the two forces further fuelled the demand for dollars while sequestering its supply from the market. This further led to the fall in rupee.

Last, there has been shift of FII’s (Foreign institutional investors) from the Indian markets during the current financial year 2013. FII’s entry leads to a high inflow of dollars into the Indian market. As per a recent report, the share of India’s FII in the developing markets has decreased considerably from 19.2 % in 2010 to 3.8% in the year 2011. As FII’s are taking their investments out of the Indian markets, it has led to an increased demand for dollars, further leading to a spiraling rupee.

Encompassing all these factors, there is a lack of firm initiative by government on issues such as allowing FDI in retail. Debacles such as 2G have further rendered the Indian market unattractive to a certain extent.

Evaluating the impact of the falling rupee on the Indian economy –

The first major impact of the falling rupee can be seen on the rising import bill. India imports close to 70% of its net fuel requirements. This means the companies importing oil have to shell out more rupees for the same dollar invoices. As is clear, although the price of oil has gone down from $111  per barrel last year to $103 per barrel in June 13, not much benefit can be derived since exchange rate too shot up from Rs. 54 to Rs. 61.1 a dollar.. This has severely impacted the bottom line of many companies as well as the subsidy bill of the Indian government. Huge buying of dollars from the market in order to meet the import bill has further added to the existing woes. Additionally, the falling rupee has added further to the inflationary pressures, as imports have become costlier and thus increasing the prices of key commodities such as oil, imported coal, minerals, and metals. However the falling rupee has substantially appreciated the revenues for the exporters, who receive more rupees for their dollar receipts.  These industries include the IT Services industry, textiles and other export oriented industries. Increasing imbalance in trade i.e. increasing imports over exports is bound to have severe impact on country’s fiscal deficit, which is targeted at 4.8% of GDP.


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