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Rupee conundrum

Rupee conundrum
Highlights

Indian currency is at it yet again. It started setting records on the wrong side. Last Thursday, it slipped below Rs 69 against US dollar for the first time in the history. Though the currency recovered a wee bit thanks to the intervention from the Reserve Bank of India, it continues to be on a sticky wicket, with analysts saying that it will soon touch Rs 70 against greenback.

Indian currency is at it yet again. It started setting records on the wrong side. Last Thursday, it slipped below Rs 69 against US dollar for the first time in the history. Though the currency recovered a wee bit thanks to the intervention from the Reserve Bank of India, it continues to be on a sticky wicket, with analysts saying that it will soon touch Rs 70 against greenback.

Rupee lost 8 per cent so far this year. And there are myriad reasons for the rupee depreciation. Foremost among them is rise in crude oil prices. India meets 70 per cent of oil consumption needs through imports. So, a steady rise in oil prices will drive up the country’s import bill, putting pressure on the current account. Weak macro signals in the country, stronger US economy and higher bond yields there are compounding rupee woes. Overseas investors and funds took out Rs 48,000 crore from Indian capital markets in last six months.

This was steepest outflow in a decade. Further, foreign direct investment (FDI) inflows which hit record levels in the early years of the Modi government are in slow lane now. FDI growth rate hit a five year low of three per cent in FY18, though the country received $44.85 billion through this route. This slowdown in FDI inflows is a clear indication that India is slowly losing sheen as a destination for foreign investments. On Tuesday, NITI Aayog tried to allay fears about the currency by saying that ‘weakening of rupee is not a cause of worry’. Its Vice-Chairman Rajiv Kumar went on to claim that the rupee was overvalued. That’s just absurd.

Nevertheless, rupee has never been strong. It saw 6800 per cent depreciation since Independence. In 1947 when India got freedom from the shackles of British rule, rupee and the US dollar were on equal footing. That means one Indian rupee was equal to one US dollar. Wrong economic policies took a heavy toll on the currency in subsequent years.

Adding fuel to the fire, the Indira Gandhi government devalued the Indian currency by almost 57 per cent to Rs 7.5 a dollar from Rs 4.75. Again in 1990s, PV Narasimha Rao devalued the currency to tide over foreign exchange crisis. The main intention behind both the devaluations was to increase exports thereby earning more foreign exchange. But India could not enhance its merchandise exports to the level it desired.

However, it succeeded in increasing the export of human resources as Indians encouraged by cheaper rupee had been making beeline to the US, Middle East and other geographies. Going by the widening current account deficit, exporting human resources and services like IT will not be enough for India to stem the rot in the currency whose depreciation will hit the poor the most in the globalised world where commodities cost more or less same around the world. India needs to recalibrate its policies to put rupee on a stronger footing like the US dollar, currencies from other developed countries and China’s yuan.

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