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The Tale of Falling Rupee

The rupee has dived to an all-time low against the dollar. The fall has become a subject for debate. The reasons discussed on the fall of the rupee are macro economics matters such as economic growth, current account deficit, rising imports etc. This article tries to throw some light on the reasons of the depreciation since independence.

At the time of independence the rupee was at par (meaning 1 $ = 1 Rupee ) with the dollar ; the reason being India had no foreign borrowings. The dollar slowly rose because of 5 years plan (not surprisingly the dollar rupee time cycle is also 5 years) and the subsequent requirements for foreign investments in India.

In 1985, after the Bofors scam, which tumbled Rajiv Gandhi’s government, the dollar was equal to 12.35 rupees and since the economic liberalisation in 1991, there was a sharp devaluation of rupee and the rupee had dropped to Rs.24.5 against a Dollar.  At the end of 1999, the Indian Rupee was devalued considerably. In period 2000 and 2007, the rupee stopped declining and stabilised in the range of 44 to 48 against dollar. The rupee touched a high of 39 per dollar in 2007 but the global meltdown in 2008 put a stop to the rally and it hit a fresh low of 51 in 2008.

In 2011 rupee was the worst performing Asian Currency of the year. It gave up 18% in just 4 months from Aug 2011 to Dec 2011. The major reasons then being global in nature viz., European debt crisis, speculations that rupee will depreciate further, shift of FII’s (debacles like 2G rendered the Indian market unattractive).

In 2013 rupee lost 20% of its value and was one the world’s worst performing currencies. It was hurt by range of factors. A rise in import bills resulting in current account deficit, slowdown in growth rate (lowest level in a decade ) and global factors like oil prices ( India imported 80% of its oil requirements), sharp deceleration of the GDP growth rate and a virtual stagnation in manufacturing.

2018 : The Turkey tail, devaluation of Yuan, rise in the crude oil prises, the trade tensions are contributing in  putting pressure on emerging market currencies including rupee.

Role of RBI:

RBI has always been extremely cautious in its intervention during the entire rupee depreciation crises. Looking at the current global economic outlook, the currency crisis does not seem to stay for a longer period this time around.

Any intervention by the Reserve Bank of India (RBI) will not help much to stabilise the rupee as the fall in the currency is due to global factors, top finance ministry official said on Tuesday.

The uncertainty surrounding Turkey crisis and strength in the dollar index, importers are buying dollars aggressively under panic. Still, economic conditions in India are relatively stable. So, if and when global conditions improve, the rupee may regain strength.

RBI may increase rates on Non-Resident Deposits to attract more dollar deposits. RBI and government have been looking at new segments to invest into the government bonds. The NRI bonds would be a more stable form of getting money at reasonable rates from outside India.

A word of caution:

The government and RBI cannot sit on the belief that the global factors themselves are going to turn around i.e. the basis of crisis that had caused the trouble for the rupee would disappear and rupee will regain. The statements like “Even if the rupee falls to 80, it will not be a concern provided all other currencies depreciate in the same range,” are somewhere indicating the approach to be more or less the same as mentioned above.

The rupee cannot be allowed to depreciate continuously. Every such depreciation increases the costs of imports, especially of oil, which, automatically pass through to the ultimate consumers, entails an inflationary burden on the people.

The Tale of Falling Rupee
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