Millennium Post

What to blame for rupee slide?

The rupee’s continued devaluation, touching a lifetime low of 68.85 against the US dollar on Wednesday, logging the biggest single-day loss of 256 paise is not merely a matter of its weakening strength against the global reserve currency. The downward slide, which is unusually sharp and rapid, depreciating by over 20 per cent against the dollar in the last two months alone, indicate that the fundamentals are shaky and it’s the economy as a whole which needs to be bolstered and not the currency alone. Clearly, the government’s earlier attempts to increase foreign direct investment by hiking the FDI limit, didn’t pay off as much as expected and the economy slumped in spite of the pro-market ‘reforms’ brought by the finance minister.

Along with the rising current account deficit, what has contributed ultimately to the weakening of the rupee is not only the fact that India’s demand for foreign exchange (particularly its import-mania that flushes out significant dollar reserves down the drain and sends them flying out of the domestic economy) far exceeds its ability to earn it, but also what we see is the sheer force of dollar diplomacy at its full strength. So, the dramatic decline in rupee’s value is not only on account of the systematic ‘tapering off’ of the US Federal Reserve bond-buying schemes (quantitative easing), which had pumped in liquid dollars into the global market, particularly the emerging economies such as those of Turkey, Argentina and Brazil, but also because India has neglecting its manufacturing and export sectors to the detriment of the entire economy. 

Hence, essentially, there’s a two-pronged attack on the Indian rupee – one, from the drying up dollar reserves and withdrawal of liquid money from the system, and two, by the inherent inability of the economy to shore up the rupee minus the bubble of hard cash and without a robust manufacturing and export segment.
The case in point is China, which keeps its currency, yen, artificially lowed in value, so that to incentivise its usage as an exchange and trading currency. But China doesn’t stop at that strategic but cosmetic decision and works extremely hard to ensure that its manufacturing and export sectors operate at the best levels, ever-maximising the export output. Hence, although the rupee plunge is a definite offshoot of speculative and selfish market jitters on the part of the global corporate sector, particularly in the wake of what gets perceived as the UPA government’s ‘socialistic’ projects, such as the Food Security Bill, or the Land Acquisition Bill, that is probably not the only reason. Rupee’s collapse could also be attributable to the situation in which a large current account deficit and non-stop inflation add up to create a fiscal nightmare, while the loss of confidence in the business sector adds to the woes.

Unfortunately, the RBI and finance ministry have tried their best to safeguard the rupee’s interest, by hiking import duties so as to prevent depletion of precious dollar reserves, that alone cannot solve the currency conundrum. This only proves that our economy is too FDI-dependent and relies on external support to sustain itself and grow. What in fact needs to be done at this juncture is to shift the focus back on the economy as a whole, and try to bolster the domestic production, so that the currency attracts enough reason to move up the ladder.   
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