Fall in Rupee Value

The fall in the value of Indian rupee against American dollar is a matter of grave concern. The rupee has depreciated by about 40% in the past two years. The Indian rupee has lost 20% of its value against the US dollar this year (2013). The rupee, which was valued at around 55 to a US dollar in January, now trades lower at 67.Indeed each passing day is seeing a new low. The continued fall in the value of rupee against dollar, however, is shrouded in mystery.  Although the country is grappling with a record current account deficit and a huge budget deficit (factors both weighing on the rupee), the situation is not grave enough to warrant a continued fall of rupee value against dollar. There are no meaningful reasons for the rise in the value of dollar against rupee, for the American economy has not shown any solid symptoms of revival in terms of growth rate or employment generation. Similarly, the fundamentals of the Indian economy are not so weak to bring about such a fall in the value of Indian rupee. Reports show that there is an international conspiracy to compel India opening more sectors to Foreign Direct Investment (FDI).

Nevertheless, some analysts feel the rupee has weakened due to structural problems in the economy and the trend would continue if they were not addressed urgently. Others maintain the recent volatility is more due to speculations and external factors. Many believe that the fall was triggered by the hint from the US Federal Reserve in May that it would soon begin paring back its massive economic stimulus programme. This led to exodus of investors from emerging markets, especially from India. For instance, foreign institutional investors (FIIs) have sold about $4.2 billion in bonds this year. Adding to concerns, overseas funds are also shedding some of their stock positions, having sold about $750 million in equities over the previous six sessions. So there is actually a plight of capital which resulted in the outflow of dollar.

But the major reason for the weakness of Indian rupee is the rising gap between imports and exports. India's current account deficit -- which is the difference between the total imports and exports of goods and services, as also inward and outward money transfers – shot up more than 10 times in five years. A fall in the value of rupee makes imports of everything from oil to coal and chemicals costlier, and comes as foreign capital inflows into India are drying up and the government is trying to cap the gaping current account deficit.

 Due to obsession with liberalisation and globalisation India has fallen into a trap. It has allowed importing all sorts of low quality and cheap items especially from China. Most of the products imported from China are harmful and useless items, especially toys and consumer durables. Moreover, due to the unwarranted expansion in automobile use, the demand for petroleum products has gone up disproportionately. All the major automobile companies have entered India in the past decade and trumping up demand for automobiles. The import bill for oil has gone up substantially. Another reason is the growing import of gold. All these factors have led to greater outflow of dollar, besides inflationary pressure in the economy.

Added to these factors, India is suffering from lack of good governance. In fact, the government has been keeping stony silence until recently when the situation became very serious. The Prime Minister has not shown keen interest in regard to the economic crisis facing the country. Due to his obsession with liberalisation and globalisation, he has not cared to look deep into the economic woes facing the country including depreciation in the value of rupee vis-a vis American dollar or British pound sterling. The Finance Minister also remained a moot spectator. So, also the Reserve Bank of India. All of them miserably failed to step in at the right time in an appropriate manner. Now, when they have thought to intervene in the situation has gone out of control.

However, if the Government choose to take effective steps to initiate proper measures to bridge the current account deficit as well as to control the outflow of dollar due to the plight of capital, it is still possible to reverse the trend in the depreciation in the value of rupee against dollar. Firstly, efforts should be made to raise the level of exports from the country which has remained sticky   during the past many years. Steps should be taken to stimulate export of engineering goods. Secondly, steps should be taken to reduce imports, particularly all non-essential items, particularly from China. Thirdly, the import of gold should be banned and purchase of gold by households shoud be discouraged. Fourthly, limit the import of oil and other petroleum products, which is possible only through discouraging the use of private transport and by encouraging the use of public transport. Fifthly, measures should be initiated to prevent the outflow of foreign capital. Sixthly, steps should be taken to bring back the black money stashed in foreign countries by politicians and others. Seventh, promote internal savings and thereby reduce dependence on foreign capital, including foreign direct investment.