Rupee is not sliding; Dollar is strengthening – True or False?

Rupee is not sliding; Dollar is strengthening ?

KAKALI DAS

“Rupee is not sliding, Dollar is strengthening”, said Nirmala Sitharaman, and memes started circulating – “I didn’t fail in the exams, invigilator gave less than the passing marks”, “Titanic didn’t sink; it was water’s fault”, “We didn’t lose the match, opposite team won”, and many more.

Does these make any sense?

People mocked this statement by the Finance Minister, and recalled this logic – once made by Narendra Modi – “Actually, the weather isn’t cold, but because of age, people’s tolerance to cold has decreased. Similarly, climate has not changed, we have changed.” (slow claps)

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What Nirmala Sitharaman has said, is it technically correct or incorrect?  Actually, she is logically and technically correct. But there is more to it than meets the eye. If Nirmala Sitharaman is opposition, then she would make fun of such a statement. In fact, she commented on rupee when she was the opposition before.

Is the dollar strengthening?

1 USD was INR 82.35 on Friday, and may continue to slide – dollar is incessantly strengthening without a doubt. Rupee has gone from Rs.74.50 in 1^st Jan to Rs.82 in October. Important to note, all major currencies – Euro, British Pound, Australian Dollar, Japanese Yen – are weakening against the USD. Dollar index is up by 9% (highest in 20 years). Hence, there is no doubt that Dollar is strengthening.

Why is the Dollar strengthening?

Because the US economy is fundamentally stronger than other economies. Job market in the US is showing resilience, booming despite high inflation, service sector rise, etc. – all factors helping in their growth story. Federal Reserve System is increasing interest rate after help amid pandemic. Meaning, extra liquidity is sucked, hence value of dollar is rising.

Why haven’t the same measures ensured here in India?

On one hand, we say that India is a bright spot among all emerging economies, and on the one hand, we comment – dollar is strengthening, not us weakening. There is a limit to hypocrisy!

Is the Rupee better off than others?

Yes, to an extent. In terms of September 1, the valuation of rupee has depreciated to 2.6%, in comparison to Korean Yuan/British Pound, Aus. Dollars, Swedish Krona/ Chinese Yuan, Philippine Peso which have depreciated to 6%, 4.8%, 4.1-4.6% respectively. Other currencies are depreciating to double or triple than Rupee against the USD. So, there is no doubt that our situation is relatively better than the other currencies in the world. But, we are also relatively better in hunger index – we are better than Afghanistan – so, does it help? Not to forget that 2% growth for America is good as it is a very large economy – same for ours is not ideal.

Why has the Rupee fallen?

The truth is, rupee is weakening too – we must let go of our arrogance. Forex reserves have declined substantially from $642 billion in October 2021 to $532 billion in October 2022, in an attempt to prevent currency depreciation. RBI spent $110 billion in order to stabilize rupee. Still, by March 1, the USD may be 84-85 INR.

Keeping politics aside, why is rupee falling and will fall more by March?

Reasons of Falling Rupee

• Rising Crude Oil Prices
• High trade deficit
• Depleting foreign exchange reserves
• Foreign capital outflows

All of the above reasons should be understood or taken into account. Because when dollar rises in popularity, investors also want to be a part of it, considering it a safe investment. And emerging economies like India are more volatile, so money is pulled by investors. However, Vietnam currency depreciated by 1%, while ours 10%. Why?

Secondly, when investors pull money, INR depreciates. Foreign Portfolio Investors (FPI) sold 23 billion dollars – Why? This much was invested hoping Indian market will give returns. Net Foreign Direct Investment gives cushion. But, overall, the attitude of investor is not favourable at the moment – India is not a favourable destination.

Thirdly, when rupee will depreciate, buying crude oil will get more expensive. That further weakens the currency. We all know that the price of crude oil has a great impact on economy.

Two lies should be busted related to our currency –

First lie, “the crash of 2013 was due to the government’s mistake, but this decline is not”. In 2013, rupee crashed for similar reasons, however other economies fared better, but reasons were same – surge in dollar demand from imports, capital outflows, unwinding at quantitative easing, high international oil prices, current account deficit, and RBI’s failed attempt to control falling rupee.

There is one stark difference – at that time, this type of logic was not used that “rupee is finding its natural course” (a statement by Sitharaman). These comments were not in use before – only now. Many economic factors influence rupee, some under control and some not. Events like pandemic and war are unforeseen factors, we have to keep ourselves strong and resilient in these times.

The politics on rupee is the same that BJP had used before 2014, now it has come full circle, at least in politics. It was Narendra Modi who criticised the then government before 2014 regarding the deteriorating economy with statements as- “Ineffective clueless leadership worsens an already bad scenario”,“dollar strengthening while rupee weakening is not good for country” etc., and now, when the onus is on him as the Prime Minister, he is acting deaf and dumb.

Second lie, is export industry will benefit largely by weakening rupee. It’s true that if rupee depreciates, some exporters will take advantage. But, because India is a net importer country, there is a heavy loss, in purchasing like oil, gas, raw materials, etc. And the capital intensive industries take a hit. If raw materials used in jewellery automobiles etc. are expensive, then end product will be extensive and exports will also be effectively costly. Merchandise exports in India is 9-month low anyway, i.e. $33.92 Billion in August. All currencies have depreciated, so there is no competitive advantage.

How does this impact India?

• Rise in inflation – Impact of depreciating rupee – over 80% crude oil is imported – which will increase inflation.
• Expensive Goods – Imported goods like electronics – Laptops, Fridge, Phones, TV, Solar Panels etc. will all be expensive, as rupee depreciates.
• Costly Education and Travel – Traveling abroad will be costlier, the expense of education will surge too.
• Stock market volatility – Market investments will fluctuate more often.
• Expensive debt – Repaying foreign loans will get expensive.
• Trade Deficit – But, what’s most astonishing is that the trade deficit of India rises 88% – $192.41 billion in FY22. Roughly estimating – Goods worth $400 billion were exported overseas, but as a country, the imports were $600 billion. Now, who will clear the deficit of $200 billion? How will such an economy be stronger? That’s why, the value of rupee is depreciating day by day. Very large trade deficit is not ideal for growing economy.
• Remittance Economy – With $87 billion, India beats China as top remittance recipient in 2021.

The Solution

Firstly, acknowledge the problem, that the economy is in danger – this is the big step. It’s a fact that India is better off than many economies now, but organizations have cut growth forecast in fiscal year. Make in India needs to revamp – which till today is nothing but mere jumlebaazi.

• Focus on Production Linked Incentive (PLI) Scheme
• Focus on labour intensive industries. India has to become global hub of products, like Bangladesh became hub of textile. Nirmala Sitharaman herself asked why India Inc. are not investing in the country
• Stop tax terrorism. Conversation has to increase, arrogance to be curbed – less politics and less tax terrorism.
• Less politics, more economics. Otherwise, foreign companies will remain with China.
• Conducive business atmosphere – without fear and with more freedom.

[Images from different sources; Headline image: financial Express]

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