Rupee’s Crisis Temporary?

Source: The Hitavada      Date: 21 Sep 2018 10:44:29

By T.N. ASHOK,

On September 3, the rupee closed below the Rs. 71 per dollar mark for the first time ever. This came a mere 18 days after it ended below the Rs. 70 threshold. Since January, the Indian currency has already depreciated by 10%, international agencies claim

 

APPREHENSIONS hover as dark clouds over India’s economy apear posing a big challenge to the Modi Government while both the rupee and the crude oil price race against each other to touch the 100 mark. Crude prices have already touched the 100 mark a couple of years ago but dramatically fell by almost 60% within months. But the Rupee has been constantly sliding? This might baffle the common man as he has to pay more for goods and services he buys and worry the politicians, especially the ruling BJP which faces elections to state Assemblies in Rajasthan, Madhya Pradesh and Chhattisgarh in coming months or year.


And with general elections just nine months away, fuel prices going up with Government unable to control it because the administrative pricing mechanism has been scrapped and now linked to market pricing forces, crude prices up and up away, may make an impact on the voters’ minds.


It’s not as if the Modi Government is not aware of this, and being a very strategically minded PM, consultations are on at the highest level between the PM, Finance Minister and the Reserve Bank of India to control the falling rupee, now internationally described as the worst performing currency. As the fall began some months ago, foreign portfolio investors began withdrawing from Indian money markets and some estimated 5 billion USD has flown out of the country.


As an Emergency Response Team (EMT) of Modi Government goes into action, let’s analyse why the rupee has been constantly falling, albeit with some momentary rises, only to deceive. Can the Government prevent the rupee from touching the 100 mark? Economists believe the rupee fall is temporary and it will not reach a century but stabilise once and for all at the Rs. 70 mark ….. a calculated move to bail out the United States and itself, both of whom have an adverse balance of trade with each other as also with China, which has an overheated economy forcing it to devalue its Yuan. So shall we call it an unofficial devaluation of the rupee against the USD? It might seem so. Let’s look at some of the reasons why the rupee is cartwheeling and become Asia’s worst performing currency.
On September 3, the rupee closed below the Rs. 71 per dollar mark for the first time ever. This came a mere 18 days after it ended below the Rs. 70 threshold. Since January, the Indian currency has already depreciated by 10%, international agencies claim.


The news that the Indian economy grew at a sprightly 8.2% in the April-June period, the highest in nine quarters, provided some cushion, but only so much. “With the environment we are in right now, the rupee is more likely to track global cues,” IFA Global, a forex advisory firm, is quoted by the media as saying. Here are some possible reasons for the rupee’s constant decline. Crude Prices: International crude oil prices, which stabilised in the April-June quarter of FY 2018-19, have once again begun to rise up and up. In the last fortnight alone, it has shot up by as much as 7 – 8 $ per barrel. Crude oil futures were trading above $ 75 per barrel on September 3. As India imports over 80% of its fuel needs, rising oil prices lead to a higher dollar bill which, in turn, weakens the rupee, trade analysts say.


Current Account Deficit: Economists say that the double whammy of both rising crude oil prices and a weakening rupee spell danger for India’s economy as its current account deficit (when import expenditure exceeds export earnings) may widen to 2.8% of the GDP this financial year, up from 1.9% last year, according to a report by the noted financial services agency Nomura. This year, the deficit has already jumped to a nearly five year high of $18 billion adding more pressures on the INR. Unresponsive RBI: Normally, when the rupee weakens, the federal bank, RBI, offloads from its currency chest a certain amount of dollars to make up the shortfall of the greenback to prevent the Rupee’s free-fall and shore up its value so that import costs damages are limited. But so far, RBI has not intervened aggressively to push up the rupee, claim some economists.


“The intensity of RBI’s intervention has dissipated,” claims AbheekBarua, Chief Economist at HDFC Bank, one of the country’s biggest private lenders. “While there seems to be complete lack of communication from the RBI, comments from officials from the Government and quasi-Government agencies seem to appear as if they support this fall in the rupee’s value in the interest of competitiveness in the market.”


As India opened up its economy under PM Narasimha Rao and Finance Minister Dr. Manmohan Singh, a reputed economist who was later to become a PM for two terms, the rupee rose to Rs. 37.42 per dollar. In the UPA regime under Dr. Singh, the rupee almost stabilised at 43.47 to 46.37 per dollar a moderate increase. But the 2nd term of the UPA, when scandals burst open, from CWG to Coal Scam to 2G Spectrum bungle, the rupee ascended to a historic high of 59.44 by 2014 when the Congress was defeated at the polls.


When Mr. Modi took over in 2014 with great promises of reforming the economy and rooting out corruption, the rupee still ascended from 59.44 to a dollar to 66.79 per dollar in 2015, but this was mostly ascribed to global economics of recession and economic meltdown. But the rupee has been falling ever since. Today it’s being traded at Rs. 72 to a dollar, the highest rate of increase, but some economists claim that the increase is more due to global pressures and it has been much lesser than the scandals of the UPA, which rocketed the rupees fall in its second term.


Even then, with fuel prices at an astronomical high, Rs 85 to a litre in Chennai and Delhi, and similar high in other cities, the statement by BJP’s once trusted ally TDP and its head Andhra Pradesh Chief Minister N. Chandrababu Naidu rings warning bells for the Government ahead of the Rajasthan polls in December this year and 2019 general elections in May.