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Rupee nosedives

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There was no relief from freefall, as investors’ sentiment lay completely torn. The rupee closed on Monday registering a new low of 63.13/$,...

There was no relief from freefall, as investors’ sentiment lay completely torn. The rupee closed on Monday registering a new low of 63.13/$, down over 14 per cent against the dollar this year, thus marking a decadal fall on a single day. Although a series of measures was taken by the government and other regulators, the rupee hit new lows in the past two weeks. In fact, the pressure on the rupee increased over last two years as the confidence of the foreign investor was beaten against the Indian currency due to slowing of economy and increasing current account deficit.

Even the weakness in the rupee is evidently being seen since the opening of the trade on Monday; Government agencies failed to take any major step to contain the rupee fall. Moreover, the Finance Secretary was vocal that ‘the government, for now, is not considering taking any further steps for tackling the rupee’s fall.’ Perhaps, it is a sensible decision, as globally most of the currencies of emerging markets have fallen expecting that the United States may soon roll back the stimulus measures which are responsible for channeling the big-ticket investments outside the America with a view to gaining higher yields.

Of course, there are some home-made failures on the part of the government – slow pace of economic reforms, host of corruption charges against people who matter in the government, an opinion formed by foreign investors about policy paralysis, and a record Current Account Deficit (CAD) have added up for the present currency crisis. And then there were some ill-timed policies like monetary action which has lowered the financing window and increased the interest rates. Now, the markets are looking at the banking regulator for more such action, which is not forthcoming, allowing the rupee to fall freely.

Of course, we should not blame the government for all this. In fact, the government never had been a passive spectator. With full force, it had stepped in and initiated a number of measures. The Finance Minister was also determined to contain CAD to within $70 billion, 3.7 per cent of the GDP.
The proposed measures – raising import duty on gold, silver, bringing down the import bill on petroleum products, etc – will boost dollar supply and avert a balance-of-payment crisis. We hope, as mentioned by Dr Manmohan Singh during his Independence Day speech, that, “There is no question of going back to the 1991 crisis”. The country has painful memories of 1991 payment crisis. India was forced to fly 47 tonnes of gold as collateral for the IMF loan, a national humiliation. There is some solace from Kaushik Basu, the former chief economic advisor and present World Bank economist, that ‘the country is not in danger of a full-blown crisis’.
But he feels that it will have to face difficulties in the next 18 months. “The situation is not as bad as is being captured by the mood,” he told AFP. It is true to a large extent. The crisis is more due to growing fear about the economy and the Government’s ability to deal with the situation. And the nervousness is all because the foreign investors have pulled out cash. As Kaushik points out, the gloom is ‘overplayed’.
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