What's Fundamentally Wrong
In simple
terms, Rupee depreciation means that the rupee has become less valuable with
respect to US dollar and other countries can buy more from Indian markets by
spending the same amount of dollars, which in turn means that our exports are
more lucrative to foreign countries (since all the business transactions are
carried out in US dollars). Increasing current account deficit, volatile
domestic equity market, policy inaction, dependence on foreign money are some
of the major causes contributing to rupee depreciation. Even though a lot of
efforts have been put in by the RBI & Finance Ministry to control it,
nothing seems to be working positively. Then what is going fundamentally wrong?
The first
reason can be attributed to the Strained liquidity. The central banker's
ability to intervene in the currency market remains strictly limited as we are
running close to losing foreign currency reserves in terms of import cover. A sizable
portion of external debt maturing over the next few months would require to be
rolled over domestically, as global risk aversion would make the dollar
availability limited and will in turn put pressure on the rupee liquidity. Any
move by the RBI to support the rupee would put further pressure on the already
strained liquidity. Along with all these factors mentioned above, unless we
bring inflation under control and reduce the supply-side constraint, the rupee
is expected to depreciate further against the dollar. The second one and at the
core of the issue is the burgeoning Current Account Deficit [explained as
imports over exports leading to a deficit] that makes India vulnerable to
external shocks. And as one looks at the basket of goods imported, economists
within the establishment somewhere down the line hold surging gold imports as
the villain of the piece apart from oil and coal. For 2012-13 our gold import
bill was $55 billion. This import creates huge pressure on the rupee as it
converts precious foreign currency into gold. In the process, the government
suffers from a double whammy. First gold import causes current account deficits
and secondly, it is the cause and consequence of proliferation of unaccounted
money within the national economy. Surely it is a gorilla in the room but yet
to this date the Indian establishment would offer nothing concrete except to
wish it away. And most important of all, How about governance? Thanks to
a decade of mis-governance and policy paralysis at the Centre, production of
even ordinary items has been stymied within India. That has compelled Indians
to import when many items could be
ordinarily produced or manufactured in India. India's overall external debt
outstanding as of June-2013 was $390 billion, an increase of 12.9% per cent
from last year. Additionally, a sizable portion of India's external debt is
believed to be financed by European banks, which were the most active lenders
to emerging Asia, much higher than the US or Japanese banks put together. Thus,
with the ongoing re-capitalisation needs of European banks, it is likely that
these banks will be less forthcoming in refinancing Indian corporate debt.
Allowing the
depreciation of the rupee is as bad as surrendering our country to the force of
the dollar, eventually forcing us to towards providing cheap labour and
providing demographic dividends to other countries. Unless we control inflation
and reduce the supply-side constraints, the rupee is expected to depreciate
further against the dollar. We need to look into the source of saving from
various small drops of foreign exchange to build required reserves.
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