Rupee or USD to touch the 100 mark?

Global Economics playing havoc with exchange rates?

TN Ashok

Apprehensions hang over as dark clouds over India’s economy and as a big challenge to the Modi government as both the rupee and the crude race against each other to touch the 100 mark. Crude prices have already touched the 100 mark a couple of years ago but dramatically fell by almost 60% within months. But the Rupee has been constantly rising? This might baffle the common man as he has to pay more for goods and services he buys and worry the politicians , especially the ruling BJP which faces elections to the assembly in Rajasthan, Madhya Pradesh and Chhattisgarh in coming months or year.

And with general elections just nine months away, fuel prices going up with government unable to control it because the administrative pricing mechanism has been scrapped and now linked to market pricing forces , crude prices up and up away, may make an impact on the voters’ minds.

It’s not as if the Modi government is not aware of this, and being a very strategically minded PM, consultations are on at the highest level between the PM, Finance Minister and the Reserve Bank of India to control the falling rupee, now internationally described as the worst performing currency.As the fall began some months ago, foreign portfolio investors began withdrawing from Indian money markets and some estimated 5 billion USD has flown out of the country.

As an Emergency Response Team (EMT) of Modi government goes into action,lets analyse why the rupee has been constantly falling, albeit with some momentary rises, only to deceive. Can the government prevent the rupee touching the 100 mark? Economists believe the rupee fall is temporary and it will not reach a century but stabilise once and for all at the Rs 70 mark ….. a calculated move to bail out the United States and itself , both of whom have an adverse balance of trade with each other as also with China,  which has an overheated economy forcing it to devalue its Yuan.

So shall we call it an unofficial devaluation of the rupee against the USD? It might seem so. Let’s look at some of the reasons why the rupee is cartwheeling and become Asia’s worst performing currency.

On Sept. 03 the rupee closed below the Rs71 per dollar mark for the first time ever. This came a mere 18 days after it ended below the Rs 70 threshold. Since January, the Indian currency has already depreciated by 10%, international agencies claim.

The news that the Indian economy grew at a sprightly 8.2% in the April-June period, the highest in nine quarters, provided some cushion, but only so much. “With the environment we are in right now, the rupee is more likely to track global cues,” IFA Global, a forex advisory firm, is quoted by the media as saying.Here are some possible reasons for the rupee’s constant decline.

Crude Prices: International crude oil prices, which stabilised in the April-June quarter of FY 2018-19, has once again begun to rise up and up. In the last fortnight alone, it has shot up by as much as 7 – 8 $ per barrel. Crude oil futures were trading above $ 75 per barrel on Sept. 03. As India importsover 80% of its fuel needs, rising oil prices leads to a higher dollar bill which, in turn, weakens the rupee, trade analysts say.

Current Account deficit:  Economists say that the double whammy of both rising crude oil prices and a weakening rupee spell danger for India’s economy as its current account deficit(when import expenditure exceeds export earnings) may widen to 2.8% of the GDP this financial year, up from 1.9% last year, according to a report by the noted financial services agency Nomura .This year, the deficit has already jumped to a nearly five year high of $18 billion adding more pressures on the INR.

Unresponsive RBI: Normally, when the rupee weakens, the federal bank RBI offloads from its currency chest a certain amount of dollars to make up the shortfall of the greenback to prevent the Rupee’s free-fall and shore up its value so that import costs damages are limited. But so far, RBI has not intervened aggressively to push up the rupee, claim some economists.

“The intensity of RBI’s intervention has dissipated,” claims AbheekBarua, Chief Economist at HDFC Bank,one of the country’s biggest private lenders. “While there seems to be complete lack of communication from the RBI, comments from officials from the government and quasi-government agencies seem to appear as if they support this fall in the rupee’s value in the interests of competitiveness in the market.”

As India opened up its economy under PM Narasimha Rao and Finance Minister Dr Man Mohan Singh, a reputed economist who was later to become a PM for two terms, the rupee rose to Rs 37.42 per dollar. In the UPA regime under Dr Singh the rupee almost stabilised at 43.47 to 46.37 per dollar a moderate increase. But the 2nd term of the UPA,  when scandals burst open,  from CWG to Coal Scam to 2G spectrum bungle, the rupee ascended to a historic high of 59.44 by 2014 when the Congress was defeated at the polls.

When Modi took over in 2014 with great promises of reforming the economy and rooting out corruption, the rupee still ascended from 59.44 to a dollar to 66.79 per dollar in 2015, but this was mostly ascribed to global economics of recession and economic meltdown. But the rupee has been falling ever since. Today it’s being traded at Rs 72 to a dollar, the highest rate of increase, but some economists claim that the increaseis more due to global pressures and it has been much lesser than the scandals of the UPA, which rocketed the rupees fall in its second term.

 

Even then, with fuel prices at an astronomical high, Rs 85 to a litre in Chennai and Delhi, and similar high in other cities, the statement by BJP’s once trusted ally TDP and its head Andhra Pradesh Chief Minister N Chandrababu Naidu rings warning bells for the government ahead of the Rajasthan polls in December this year and 2019 general elections in May.

 

“The price of petrol would soon touch Rs 100 a litre as also the rupee against the US dollar. Whatever (economic) growth that’s happening now is because of India’s strength. It’s not because of the NDA government’s greatness. It would have grown even better if there was any other government,” Chandrababu is quoted by the media as saying. He claimed demonetisation was a ‘big failure’ causing people to suffer. “The economy has collapsed. The economy has suffered a setback for over one and a half years. In fact, growth has stalled under NDA and it may even fall,” he claimed saying “You can then buy petrol by paying a dollar.”

 

Naidu claimed the NDA government ignored his recommendations for making the digital economy cost-effective so that everyone switched to a digital economy. It would have contributed to higher revenues, but the Centre did the reverse, making digital transactions costly,” he claimed.Simultaneously, people have lost faith in the banking system because of the frauds, business tycoons  Mallya and Nirav Modi fleeing the country,  leaving debts of over nearly Rs 20,000 crore (about US$ 3.07 billion),  saddling numerous state owned banks with mounting NPAs.

 

The Indian rupee stabilized around 60 per dollar after hitting a record low of nearly 69 against the greenback in August 2013. And given the economic backdrop – hopes of faster growth, structural reforms and optimistic balance of payments outlook – investors should expect the rupee to keep appreciating.According to Morgan Stanley, investments in India are likely to treble from $600 billion to $1.9 trillion between 2014-24; foreign direct investment (FDI) is likely to rise to an average of 2.5 per cent of GDP by 2024 from 1.5 per cent of GDP now, and the current account deficit may remain at about 2.5 per cent of GDP over the next decade.

All these factors are likely to support the rupee over the next decade. Still, the investment bank expects the rupee to depreciate by nearly 30 per cent to 75-85 per dollar by 2024.The biggest pressure on the rupee might come from the Reserve Bank’s monetary management. According to Morgan Stanley, the RBI will remain abig buyer of dollars over the next few years to safeguard the rupee from external shocks such as a sudden spike in crude prices or a rise in interest rates in the US, which may lead to flight of capital from the country. This will slow-down any aggressive rupee appreciation on the back of capital inflows in the country.      `           `

“India’s importcover deteriorated significantly following the global financial crisis, and the RBI will need gradually to build up $100-150 billion of reserves to take the import cover back over 12 times, similarly, India’s external coverage ratio at 2.26 times is also below the average of 4 times for Emerging Market economies, making a strong case for building forex reserves,” says Chetan Ahya and Ridham Desai of Morgan Stanley.

High inflation will be the other big challenge for the rupee as it impacts the purchasing power of the rupee relative to other currencies. Countries with higher inflation tend to witness depreciation in their currency in relation to the currencies of their trading partners.

A weak rupee makes imports costlier and oil imports, which constitute bulk of the import bill, can negatively affect India’s current account deficit. In a vicious cycle, a depreciated rupee makes oil costlier since it’s India’s chief import. Costlier oil means costlier vegetables and groceries since transportation costs go up. Weak rupee also makes education and holidays in foreign countries more expensive. The goods that use imported components such as computers, smartphones and cars also get more expensive. All import-based industry and trade suffers. 

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T N Ashok is a Corporate Consultant, Resident Editor and Writer of Economic Affairs

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