In the time of falling rupees, love thy rupee. Now a days, we are exposed a lot to headliners in almost all the news dailies and portals wherein-which they are making hue and cry about the falling rupees and increase in fuel prices. Many of the times we are unable to figure out the reasons behind that and the real impact of a falling rupee on Indian Economy. But even without knowing the reason and its effect we too are getting too much worried about the same. Many a times we curse the Government policies and inability of our Prime Minister to arrest the falling rupees. Sometimes we are linking it with unemployment, sometimes we are blaming the rupees for the increased cost of living and what not, the list goes on.
Our Finance Minister says, there are virtually no domestic reasons attributable to falling Rupee. The reasons are global. Yesterday was the day in which the Rupee touched its all-time low against dollars. There are many macroeconomic and microeconomic Jargons, philosophies and policies explaining the reasons, effects and the steps to be taken by the policy makers to arrest the fall (or move the mountains) which a common man without an economic literacy cannot easily understand. There may be “n’ number of reasons such as increased external debt of India, dominancy of Dollar in International trade, increase in fuel prices globally etc etc.
In my opinion, the fall or rise in a currency of a country which had thrown open its market to the rest of the World is quite a natural phenomenon and somewhat a balancing act. It is nothing but the age old statistical theory of “Demand and Supply”. I am trying the explain the scenario in a simpler manner without using the complicated jargons and phrases.
Rupee and Dollar story- The Vicious cycle
India had opened its economic and trade barriers to rest of the world since 1991. This has resulted in a huge influx of foreign products to India and dumping of many items, from cosmetics to automobiles, to Indian markets in the form of imports. When you are importing (Buying)something you have to pay for it. Dollar being a Free Foreign Exchange Currency(FFE), the imported items to India were getting paid by converting rupee into dollars. When we are buying more Dollars by giving Rupees to pay off the debts, that will weaken the Rupees if there is not enough Foreign Exchange reserve with us. When there are more purchases / imports that will result in more outflow of Foreign Currency which is being purchased in Indian Rupees. This will result in a weak Indian Currency against the trading Foreign Currency. When rupee is getting weak, our imports will become more expensive and imported items will become expensive.
To improve our Foreign exchange reserve, we have to get more foreign currency. To get more foreign currency, we have to export something to abroad. Foreigners have to buy our products or services to fetch foreign currency in our reserve.
During the times of falling Rupees the exporters and expats will start falling in love with thy rupee. When rupees is weakening, exports from India will become more lucrative than before. Foreigners will feel that, the imports from India (Export from India to abroad) is more cheaper as their currency is having more buying power. When other countries started importing Indian products, India’s forex reserve will start improving and that will slowly improve the value of rupees against the trading currency (Dollars). India is having a huge population of expatriates who are working in almost all parts of the World. Expats are our manpower exports who are giving us Foreign currency in regular manner. When Rupee is getting weak against the Foreign currency, they will start investing in Indian market or will start pumping money to India. That will give a boost to Indian economy, especially construction and real estate sector. When Rupees is falling, the imported products will become expensive and that will create a level playing field for Indian manufacturers who are competing with foreign investors who are having sacks of money to invest. Imports will become lesser and outflow of Foreign currency will reduce. The industrial input of India will improve the macroeconomic conditions of India and improve the employment rate of India.
A balancing Act.
As India being part of liberalized economy, it cannot shy away from implementing collective decisions. As depicted above, politicians or Government have only limited role to play in currency fluctuations. Even a well performing economy can have a weaker currency or vice versa. Whatever is the internal policies of a Government, it cannot really move the mountains. From Indian perspective the major share of its Forex outflow is for importing oil. As oil is trading in dollars, more imports will result in further depletion of Indian currency against Dollars due to heavy outflow of Forex. India cannot do away the oil imports as it is an essential commodity. The way in front of India to avoid depletion of the Rupee is to import Oil by paying Rupees instead of Foreign currency. The move to import oil from Iran was the right move, but the sanctions of US on that country is hindering that move.
The cyclical movement of currency is good for a growing economy like India as it will help the Country to balance the imports and exports in proper manner. Even though the World is an open economy, the political interest of nations is presently pointed towards extreme nationalism. The installation of Trump administration in USA with “America First” as its policy and exit of Britain from European Union (Brexit) proves that aspect as correct. As the developed countries themselves are looking forward to protect their own national interest such as job creation and other micro economic matters one cannot expect more leniency towards growing economies.
Rupee will come up as its own when it sees its bottom and no additional measures other than usual firefighting is needed from the part of regulators to manage it. It is better to Love thy Rupees in its good times and well as in bad times as you have been left with little options to choose.