The Plummeting Rupee

The Plummeting Rupee

There is no plum in plummeting even though it is there in the spelling. This free fall in the value of the rupee has been given temporary pause by the Fitch upgrade of the Indian sovereign credit outlook to “stable” from negative. But the trend line is downwards, and is going to impact our balance of payments, imports, reserves, inflation, deficits and image. Not to mention tourism and studies abroad.

A falling currency weakens every nook and cranny of the economy and cannot be viewed in isolation.

The declining value of our money, partially convertible as it is, signals a failing economy. And being told not to panic by the Finance Minister in an era of 24x7 scrutiny by expert observers, won’t make it better or make it go away.

And the rupee’s inexorable decline has been steady to rapid in recent times.  It has declined 5.5% in value since January 1^st, 2013 and 7.5% in the last month alone, since May 1^st 2013. 

Chief Economic Adviser Mr. Raghuram Rajan says the Indian rupee is declining because of debt outflows occasioned by the US Federal Reserve saying they may taper off asset purchases in September.  So, to interpret Mr Rajan’s explanation, emerging market money is rushing back to the US to get in under the eiderdown before it is too late.

But even then, why this single reason should cause such sharp declines in the rupee’s valuation is unclear to other observers and analysts.

The SBI Chairman Mr. Pratip Chaudhuri may have an alternate perspective on why the rupee is weakening so drastically. He is lamenting the terrible IIP data of June 12th that shows growth at a dismal 2% for April. This even as retail inflation is at 9.30% according to the Government’s self- serving analysis, though actually consumers know it is well into double digits.

If manufacturing in India is at a near standstill and overall GDP is at 5% for this fiscal, which is at least 3 to 4% points below levels required to both run our economy properly and alleviate poverty; then we are turning into a nation of traders alone. And traders will have to contend with much greater volatility in their fortunes.

The more proximate reason is that yields from debt instruments decline sharply if the currency goes down over 12.5% in six months! So why shouldn’t FII’s, and other domestic players for that matter, exit fast? 

Though the cart and horse of it is that the FII’s have pulled out over $3 billion from Indian debt instruments in the last 14 trading sessions alone.

The Stock Market is reflecting the gloom with regard to the IIP and retail inflation figures too. It has been in the doldrums ever since 2008 for one reason or the other. And the rupee has declined from the forties to the US dollar to nearly 60 in the interim.

Global ratings agency Fitch is enthused with the recently announced decline in the fiscal deficit figure over the budgeted one, even in a sharply slowing economy. Our 5% GDP figure for this fiscal is the lowest in a decade.  Still it is better than a further threatened downgrade and is most timely.

The trouble is that UPA has paid scant attention to the income side of the ledger for a very long time and this in policy terms has proved disastrous. It may be too late for this Government to do anything about it this late into its term.

There are just months to go before the general election. But given a good monsoon and the thousands of crores that will be poured into the election machine, the economy is due to revive in  the typical Indian way. 

Which is, a combination of the official and unofficial economy joining hands under the table.  As for the value of the rupee, it is unlikely to revive any time soon, unless there is a gush of dollars flowing into the country for some reason at present unknown. Stranger things have been known to happen at election time.

(686 words)

June 13^th, 2013

Gautam Mukherjee