Rupee is on a slide, whose base is out of sight at this moment. The Indian currency is floating in a dangerous zone around 60 against a US dollar for quite some time sending all kinds of negative vibes in the economy of India. Though, it has made Indian exports cheaper but it has not served particularly well. Most of all, it has shaken the lives of people despite credit rating agency signalling improving financial health of India.
The immediate reason for the slide of rupee is the apparent revival of the US’s economy. The dollar has gained immense strength in recent weeks. It has touched a three year high at 84.30 on the Dollar Index. It has forced many investors to even prefer dollar to gold.
And, since the Euro-zone has again plunged in the crisis after showing signs of revival, dollar has been the rallying point. The international market is under the psyche of capital preservation and the US dollar is a safe option as it is gaining strength on the account of US’s economic revival. Just a few months ago when both the US and the European Union were reeling under recession, rupee seemed stable but the flip-flop of Euro-zone and strong signals of recovery in the US market has tilted the balance in favour of US dollar and against Indian rupee.
Domestically, the economic decision making has suffered at the hands of political indecision at large. High inflation, huge trade deficit, worsening growth indicators in industry and agriculture and worrying balance of payment at current price have pushed the country into a very uncomfortable zone. Schemes like the Mahatma Gandhi National Rural Employment Guarantee Scheme have weakened the national economy. The proposed food for all scheme aggravates the fear only.
Generally, a weakening currency helps the country to increase its exports leaps and bounds, but India faces the problem of massive outflow of forex reserve on the account of import of oil, gold, fertilizers and coal for power. Gold is the second to crude oil only in draining nation’s forex reserve. Meanwhile, import of nitrogen, phosphate and potash fertilizers have has increased by over 30% in past couple of years. Import of coal for power has doubled during the same period. The only relief for India is the declining prices of crude oil in the international markets, which have helped prevent further depreciation of rupee.
India’s balance of trade is tilted against it, with its major trading partner the European Union’s economy is in tatters. Brazil, Russia and South Africa are no better. And, with China, India’s trade deficit is too huge for to think of turning the table for years to come. There is an urgent need for India to deepen its structural reforms to bridge widening gap between import and export else the economy would be heading towards peril. The combination of increase in imports, reduction in exports, rising current account deficit and uncomfortable level of fiscal deficit has impacted the health of rupee badly despite government’s claim and assurances.
It is high time that the government and the RBI take some long term as well as short term concrete measures to discourage import of gold and possibly oil. At the same time, combined efforts must be made to encourage export. This would create an environment of sluggish demand for dollar against rupee for international trade. A stronger rupee would definitely help increasingly import dependent consumer market in India and millions of households.
