(Views expressed in this article are the personal opinion of the author himself.)
Our growing Current Account Deficit has only aggravated the concerns of all stake holders and the Government in general, and Finance Minister and Reserve Bank of India in particular have been at pains to bring order and stability to Indian Rupee.
However, the most recent free fall of Indian Rupee, when it sank to the new low the lowest ever in Indian experience to Rs. 60.73 to a US dollar has caused serious concern and joltedevery stake-holder. This was perhaps a culmination of high volatility that it has been suffering for quite some time. The Reserve Bank of India managed ostave off a bigger crisis by preventing the Rupee from crossing the psychologically sensitive barrier of 60 against the US dollar for just sometime, but it could not be held on for longer because of our low level of forex resrves.
The bankers say that the sharp fall of over 10% in a month would wreak havoc on businessmen, investors as alsothe common man. This would, in fact, upset many an apple cart.
It would be recalled that I have repeatedly been making a point that the exchange rate of Indian Rupee is highly dependent on FIIs, who can walk in or walk out, at will, depending their assessment about Indian economy. Also our forex levels are low enough to impart any strength to Indian Rupee. As of today, with our $ 290 billion forex reserves are just enough to cover seven months of imports. Our exports are declining and the prospects of our exports picking up are not at all bright;notwithstanding the tall claims and ambitious planning we might indulge into.
The global scenario on international trade is far from happy. Two most major international markets are struggling with their own domestic problems. Though there is reportedly some improvement in the US, but things are pretty bad with regard to the European Union.
Genesis of Present Crisis
Though there are several factors for appreciation of Indian Rupee. But the recent bout of weakness is fuelled by the prospect of the unwinding of the bond purchase programme of the US Federal Reserve. The US Fed had been printing money to bolster its economy. Now that there are signs of some strength in the US economy, it may start winding down the programme of adding more money into the system. It is feared that a possible winding down of the asset purchase programme of the US Fed and improvement in the health of the US economy will strengthen the US dollar. This has given rise of certain follow-on events. Investors withdraw investments from emerging markets such as India in the short term and chase assets in the US, since assets in a strengthening US economy are seen as attractive.
Impact of decline of Indian Rupee
The impact of decline of Indian Rupee, which was nearly as good as free fall, is all pervasive. There is no sector in the Indian economy which has not been adversely impacted. The sliding Indian Rupee will certainly put pressure on prices and is likely to heighten inflationary pressures in the economy and push it back above the 5% mark in the short period. A recent healthy trend of subdued inflation, which was of the order of 4.70% in April, was in fact lower than 4.89% in the previous month. This trend is now likely to get reversed.
Second, our imports will get costlier as we will have to pay more dollars for the same products than what we have been paying earlier. This will be particularly true and also wholly unavoidable in case of import of crude oil, which is the life line of the economy. Even the advantage of falling commodity prices would not be available to us.
In fact, everything that we import would get costlier which would further percolate and accentuate the inflation, making everything costlier.
Will depreciation of Indian Rupee help garment exporters?
Nearer home, garment exports have been found to be deficient, particularly in relation to targets. In fact, our garment exports have actually declined in the last fiscal. However, the depreciation of Indian Rupee could help improve our competitive edge in the international market, but this can happen only when the present low level of current valuation of Indian Rupee continues. How long will it continue, no one say. However, as of now, it looks like that probably this appreciation of Indian Rupee is likely to stay for the foreseeable future, as there is nothing that could see Indian Rupee gaining strength.
As to our price edge with depreciated value of Indian Rupee, it is more notional than real. The international buyers would now insist on Indian garment exporters lowering of prices not only for new orders to be placed by them, to share the bounty arising out of depreciation of Indian Rupee, but they would also negotiate with Indian exporters for reduced payment of the garments already supplied. The international buyers must have a pound of flesh to use the Shakespearean expression.
Not all the garment exporters would be as lucky as explained above. There has been a consistent practice on the part of bigger garment exporters to hedge the risks involved in volatility of Indian Rupee. Most of them had hedged for Rs. 55-56 to a US dollar. These exporters would stand deprived of the advantage accruing out of depreciation of Indian Rupee.
The advantage of appreciation of Indian Rupee would be, in view of the facts of the case mentioned above, and would be more notional than real and that too for a limited and in any case uncertain period that the appreciation continues to exist.
What is Government doing?
But for the intervention of Reserve Bank of India, Indian Rupee would have crossed the psychological barrier of Rs. 60 to a US dollar much earlier than it actually did. It has been the constant effort of RBI, who kept on offering dollars on sale that the declining trend of Indian Rupee could be halted, but only up the point. RBI would have, I believe, if it could help itself, released more dollars for sale, but for the low level of forex reserves. Today, RBI holds no more than $ 290 billion as our forex reserves, which should be just sufficient for meeting import liabilities for only seven months. Our liability for servicing international debts is also sizeable. Both these liabilities would continue to bother Finance Minister and the RBI.
However, the Government has been putting up a bold face. It sought to end nervousness in the financial markets, assuring investors that it had firepower to deal with the situation. Claimed Chief Economic Adviser Raghraman Raja, We are not short of instrumentsWe have a range of instruments to call on as and when needed, we will call upon them. He added, The Rupee is not in shambles. We should not be overly pessimistic. We do not like volatility. We will take actions when warranted.
However, Rajan admitted that the withdrawal of the stimulus (by the US Fed) was a tough task and added, The problem with quantitative easing is that it is easier to get in than get out.
The moot point is how long we would continue to boast of our basic fundamentals being strong, with such a fragile strength of our currency in a world that has still get out of the impact of global slowdown of 2008, which not only refuses to die out, but also threatens to come up again unless the major markets like the US and the EU revive in true sense of the term small perk-ups showing up now and then notwithstanding.
The Government needs to come clean on what instruments it is likely to draw upon and when, to restore the stability and respectability of Indian Rupee, which cannot be allowed to be subject of regular, violent fluctuation, which is causing enormous damage to Indian economy.
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