I’ve nearly always seen, the moment you observe some kind of any dramatic trend, emerging in an important index (mostly when it’s adverse, say that of the rupee), the first thing that would drive our pundits is, to split into two binary schools; the “supporters”, those who invariably see hidden virtues in the falling trend, “we’ve seen already three crises, we are still better than others”… (not true since the “paper-tantrum” of 2013-14 had dealt a much bigger blow to the rupee than other counters!) and “Nay-Sayers” who will convince you, the dooms-day is but two steps away and the Bastille falls in less than a couple of days!
I thought it’s a good idea to talk of the rupee in lay-man’s words in this column today and examine in simple terms, the questions – a) why this “historic” fall (46% in ten years)? b) Is it just the Dollar strengthening rather than the rupee falling? c) Are we in a danger of sorts with the rupee’s free-fall (slightly better in the last two days though) – with finality nowhere in sight? Should there be an intervention – or we should be hands-off on “market forces”?
My Take: To start with, I don’t think we should dismiss the “Rupee fall” as another “global factor”! I may mention that the Indian currency just nine years back, was the best performing amongst Asian currencies ahead even of the Yuan, at 54 to a dollar. It’s true that currencies of most other developed countries have depreciated more than the rupee has, recently, but we have also to look at two important points: a) why is the Dollar so strong still, if it’s true the US Economy has in fact shrunk for the second quarter in a row with talks of recession and b) why is the Rupee not emerging stronger now, given that our Core Sectors are growing by double digits in June for the second month?
The US hiked Fed Rates by a robust 0.75%, fighting an inflation of 6.9% is the key really, triggering FPIs’ money flying back home. FPIs have pulled out a whopping $33.5 billion from our equity and $2.1 billion from debt markets, over October 2021 to June 2022. (NSDL). (If Inflation rises, interest rates are increased to tighten purse-strings, if the US Interest rates increase – that’s an attraction for Investors to take back their Dollars!). The net sell-off by FPIs by the way, for those nine months, (the longest selling spree in Indian equity markets), far outpacing the 2008 global financial crisis or the 2013-14 paper-tantrum.
But we in India have to cope with our highly adverse Trade Deficits (we import much more than we export), our Trade deficits rose from 13 billion dollars ten years back to 31 billion dollars this year. Although we maintain healthy Forex Reserves of around 570 billion dollars (even after recent bouts of erosion) it is mainly FPIs and there lies the point of difference. Of the $620 billion external debts we owe, around 20% fall due this year. So, the trigger is the Dollar! and the US Inflation, which in the last quarter is indeed reportedly down and there lies the hope! Meanwhile, we did a robust growth of Core Sectors at home and actions on inflation at our end. Whatever the rates are – the key action here is against “volatility” of the Rupee, a stable Rupee at 80 is much better than a fickle 60 spiking up and down every moment!
That of course, brings us to the 3rd initiative of, Trade-Settlements in Rupee. Instead of Dollars, pay your foreign vendors in Rupees. Easier said, than actually done! You need to stabilise at home first and then offer your Rupees outside, confidence works!
So, that’s why this “historic” fall; and the Dollar strengthening rather than the Rupee falling? Now the question, are we in a danger of sorts with the Rupee’s free-fall (slightly better last two days though); my answer is no not Danger – but caution. Why caution? The common notion is, a fall in Rupee ensures profitable exports – that’s not true! Our mix of materials exported (like pharma materials, apparels, footwear and textiles) are much more price sensitive than what we import (which are more of compulsions, like fuels fertilisers and metals). With “economy shrinkages” in Western Europe, America and Asia, after the Russia’s war and impacts on trade, it’s quite difficult to see our exports fetching crying demands at higher prices because of a pricier dollar. I’m sorry, but I can clearly see a further drop in the Rupee.
My Prescriptions here: Control on deficit and control on inflation, so that at home the pressure eases on the Rupee, control on prices and servicing of external debts. I saw two reports one states we have attained 21% of our annual deficit targets already in the first three months, which is not good news, second: FDIs falling, though we are still the seventh highest FDI recipients 2021, inflows shrunk by 30% to $45 billion from $64 billion in 2020, (UNCTAD). That’s why the “Caution”!
And in conclusion: Focus on social confidence rebuild, improving non-financial perceptional indices, we still need to improve on reforms of our contract enforcements, our business processes, our downsizing of administrative “layers”, strengthening our financial sector, our data management, our human resource indices and we need a war-cry for alternative energy – Jatropha and bio fuels, solar and wind energy, electric vehicles and ethanol additives, for example.
Atmanirbharta is important! I remember a bit from Abe Ravelstein to Nikki in Saul Bellow’s “Associate with the noblest people you can find; read the best books; live with the mighty; but learn to be happy alone.” (Ravelstein).
(Binayak Datta is a finance professional)
