Hot: Sinking Ruppees
Over the past two weeks, India
has been witnessing a major downfall of Indian rupee against the US
dollar. Oil and petrol prices have been rising, food inflation continues
to rise. But this is not something that happened in a fortnight. What
are the reasons that resulted in the fall of rupee? Why didn’t the
government and the economists foresee this sudden depreciation in the
rupee value? Why are the government and the RBI not able to bring about
the efficient measures to tackle the downfall? All these have been
lingering in the common man’s mind for quite some time
now, but unfortunately, our Prime Minister and Finance Minister have
failed to give satisfying answers that can reassure the people that
being patient would actually better the situation.
Much
of the weakening of rupee is attributed to the negativity in the
market. The various steps taken by the government and RBI to promote
development, increasing the FDI limits and purchasing governments bonds
seem to have little or no effect on the market confidence. Foreign
investors seem reluctant to invest in India due to its well known
red-tape delays and corruption. Add to that the declining growth rate
for past couple of years and the increase in imports, it is a surprise
that many people are shocked at the inevitable decline of rupee.
India’s
fiscal deficit has been lingering around 5% of GDP for quite some time.
And it doesn’t look like it will come down anytime soon. A major chunk
of government’s income goes towards subsidies. India subsidizes diesel,
LPG, fertilizers for farmers and essential food grains through the PDS.
But with the corrupt systems in place, a lot of these subsidies don’t
reach the intended recipients. Furthermore, the new Food Security bill
is sure to increase the subsidy bill a lot more. Meanwhile, it is
calculated that less than 3% of Indian citizens pay tax, something which
should be the major income source for the government.
India
imports a lot of essential and non-essential goods like petroleum
products, jewelry, chemicals, vehicles and machinery. Recently, the
imports have increased tremendously, especially in petroleum and gold,
while the exports seem to grow at a slower rate. This has adversely
affected the current account deficit and has resulted in a vicious cycle
wherein imports affect the value of rupee adversely which in turn
increases the import bill. Government has tried short term solutions by
increasing the duty on gold imports, letting oil companies buy dollar
directly from RBI, but they should be looking towards long term stable
reduction of CAD. This can be achieved to a great extent by focusing on
improving the exports. The government should focus on better trade
agreements and creation of trade routes with other nations.
The
current level of Indian Rupee at 67-68 to a dollar is said to be below
its equilibrium value and that rupee is undervalued. That can be partly
attributed to the extra demand for dollar as month approaches its end
and oil companies settle their bills. With general elections due early
next year, the uncertainty over next government also affects the market.
So,
what can the government and RBI do to definitively put a hold to this
rupee decline and bring back the growth? Well, I am no more a financial
expert than you are. But let’s just hope
those in power, including the newly appointed RBI Governor, Raghuram
Rajan, who is widely respected in the financial field, find ways to
tackle this issue and help raise India back to a blooming economy. Else,
I fear, we will forever remain a developing nation.
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