Rupee Overboard!

Rupee Overboard!

The Indian currency has fallen by nearly ten rupees to the US dollar in the last couple of months to a quarter. The explanation given to us by the Chief Economic Adviser to the Finance Minister is that   the FIIs are selling their debt and repatriating the money towards the US where the Federal Reserve has indicated that it will not be taking on more debt towards the cool and cold months. The implication, despite the trillions in US borrowing is that the Federal Reserve thinks the US economy may be reviving at last. Or so thinks the outgoing Governor Ben Bernanke replete with several ifs and buts.

Meanwhile the Indian economy, like any bank facing a run on its resources, is under intense pressure. This is aggravated because our banking sector is both small and under- capitalised and not well configured to take on rapid outflows of this nature.  The rupee, like the currency of any country nowadays, is underpinned by the working economy and its fundamentals. And all parameters of these assessments are also very weak at present. So what is the consequence?

• Industry is at a near stand-still. No growth. No fresh investments to speak of.
• Exports are unable to leverage the weak rupee fast enough given the speed of its descent. In fact many exporers are caught out because of fixed price contracts in rupees wherein they cannot get the benefits of its rapid  fall.
• The balance of payments is tilting sharply against us.
• The rupee is not stabilising, even at Rs. 60 to the US $. After the Finance Ministry tried talking it up, it went from Rs. 60 to the $ to 59.70 to the $, which is a very pessimistic reaction.
•  The fundamentals or the potential of the economy is not enthusing the money markets and there is no confidence in the quality of our governance.
•  The rupee will fall further because no structural adjustments are being made to stimulate the economy and spur infrastructure development. The Government has no big idea on how to arrest the downtrend.
•  Import bills will go out of control and lead to both shortages and the wreckage of budgeted allocations, particularly for petroleum and defence purchases, both of which go into tens of thousands of crores of rupees.
• Price rises at every level, production costs, wholesale and retail price points are inevitable, as the rupee devalues spontaneously.
•  This is not a temporary blip. It is indicative of a deep malaise of a mismanaged economy.
•  The Government is not doing enough to stimulate growth in any direction. In fact it is paralysed and in denial.
•  The rupee not just depreciating but free- falling. The exit of foreign money is a thumbs down from the globalised economy of this particular emerging market and member of BRICS.
•  The Indian stock- market will take a hiding as opposed to a beating.
•  An external event in the US has made a mess of our large domestic economy because of our currency volatility and lack of action to help ourselves.
• Our deficits will go out of control.
• Global rating agencies will revise our rating downwards to “Junk” status, making international borrowing difficult and even more expensive.
•  If the automated devaluation brought on by the rupee makes some asset classes attractive, there may be slight recovery because of arbitrage opportunities and bottom-fishing.
• But a garage clearance sale is not what a worthwhile economy is about.

(572 words)

June 20^th, 2013

Gautam Mukherjee