Monday, 15 July 2013

Rupee goes downhill!!!

We gave it respect, we gave it a name, we gave it a symbol, we gave it a value...and finally it gave us a slap. This is the backdrop story of the tumbling rupee, barely keeping itself afloat....despite mammoth pressure from other foreign currencies. The disgraced economic mascot of the Indian republic, has now been deemed as the most depreciated currency in Asia, and the fourth in the entire world. June 28 witnessed one of the most epic free falls, as the rupee plunged to an alltime low of 60.72 against the US Dollar. The cannons bludgeoning the pillars of the rupee are various. Continued dollar demand, month end requirement by corporate and oil companies, rise in the USD vis a vis other currencies, bearish sentiments towards emerging economies and withdrawal of FIIs from both debt and equity markets, are a few of the many reasons. The watchdogs of the Indian Rupee-the RBI has also failed to make it's impact on this issue. They were reduced to the standard of mere bystanders as the rupee fell immutably to cross the 60 mark. The famed economic analysts had a pre-monition  that if the rupee falls below 60....then it would engage into an uncontrollable free fall that would tear out the Indian economy and play stuff ball with the wreckage. This prediction did come true, as the Rupee fell on it's knees all in gratitude to the factors mentioned above.

The most shameful of this entire ruckus, is the 'policy paralysis' of the RBI, coupled with a relentless government, engaged in a stressful campaign. The situation becomes even more astonishing as one ponders on the fact that the PM of India is himself an economist-as said by Narendra Modi. As the government turned a blind eye towards this issue...the RBI was much more honest. It had simply run out of policies and ideas to divert this issue. Coupled with failures from the deck of the  Indian stock market, the rupee drew it's inspiration from every economic aspect which was tumbling at the time. The FIIs sold $6.2 billion worth of stocks ($1.4 bn) and bonds ($4.8 bn) in June 2013 alone which resulted in a steep depreciation of the rupee. Why this is happening or how it shall implicate in the economic 'colosseum' of India is yet to be found out. As common people, we are much less aware of the economically sophisticated aspect of this issue....but we can definitely digest the fact that 'Rs 60=1$' is not good for the Indian society.

What is much more loftier than the reasons for this decline, are the consequences of this downhill race. More than 70% of India's coal and oil is imported from other nations....and the depreciation of the rupee is going to ooze out a large quantity of money from the government coffers. Further, India also imports large amount of gold, metals, wheat, etc. This ultimately ends in an increase in domestic inflation as the overall price of the commodity increases. India, will also be unable to experience the fruits of deflation, as the rupee is at it's pinnacle low. The rupee has managed to remain hopelessly consistent at a mouth-drying low of above 55. The continuous fall of the rupee is also related to the global uncertainty in the market. Many FIIs and investors have indulged in a 'flight to security' owing to the global economic slowdown. But India was probably the worst affected in relation with the magnitude of the maddening 'sellout'. This has paired with an exorbitantly high Current Account Deficit of around 6%. While an exporting giant like China, will gain from a depreciating currency...India is in no position to buy this luxury.

What has happened is not a fairytale...but it is definitely not a room with no doors. There are many ropes which can pull us out of this muck. But the government needs to play the lead role in this great film of economic recovery.

Forex Reserve Policy
Forex refers to the foreign assets in possession of the central banks and monetary institutions. The selling of these assets, which are mainly in terms with the US Dollar can to some extent help in reviving the lost hopes of the Indian banner. At the same time...there is a huge risk of a highly ammunitioned back-fire.
Raising Interest rates
By increasing the interest rates, the high outflow of fiscal garlands form the nation will decrease and the inflow of capital will also increase at the same time.
Measures by the government
Government should take some measures to bring FDI and create a healthy environment for economic growth. Key policy reforms that should be initiated includes rolling of Goods and Services Tax (GST), Direct Tax Code (DTC), FDI in aviation and retail, Companies Bill and diesel decontrol. Efforts should be made to invite FDI but much more needs to be done especially after the holdback of retail FDI and recent criticisms of policy paralysis.

These are a few of the many reforms and measures that are inevitable as far as the 'rupee reverse' is considered. Just as India is starting to develop a name for itself in the global stage...a 'bazooka shot' at the foundation of Indian economy has created a huge setback. All we can do now....is to cross our fingers and hope that our politicians and policy makers get their acts straight.

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