The weakening of Indian Rupee

After the advent of the era of globalization and new economic policies, the Indian Rupee is continuously losing its value. The exchange rate in 1990 was Rupees 17.5 per dollar. The Rupee never regained its strength in a decisive form and continuously went on declining.

Indian Rupee
Wikimedia Commons by  YVSREDDY

In the last three months, the value of Rupee declined from Rupees 64 to the present Rupees 67.3 per dollar.

Earlier the exchange rate of Indian Rupee vis-à-vis other currencies was decided by the Reserve Bank of India.

Bur after globalization, the free inflow of goods and services increased and the restrictions of Foreign Investment ended; the fixation of exchange rate came out of the control of RBI and went to the hands of the market.

The fixation of the exchange rate of Indian Rupee in terms of different currencies is now dependent on the powers of demand and supply of the market.

It is obvious that the restrictions on Imports and Exports have been waived off after globalization. Now there are no restraints like import duties and apparent bans; known as Quantitative Controls. The Foreign Investment can also come and go openly, and there are no effective restrictions on taking the foreign currency out of the country in the form of profits, royalties, interests, and dividends etc.

Therefore more foreign currency leaves India in the form of imports and incomes of FDI than that arrives in the country in the form of exports. So the imbalance in the demand and supply of Dollar is natural as our Imports are more than the Exports. If the deficiency in the supply of Dollar is not replenished from other sources, the value of rupee declines further.

It is a pleasant thing that a lot of Indians either work or live in foreign countries. They earn and send the foreign currencies to India, thereby increasing the supply of dollar/other currencies. Besides, the supply of foreign currencies also increases by clear foreign investment and portfolio investment; and the export of software, BPO, and other services.  In this way, a balance between the demand and supply of Dollar is achieved.

The value of Rupee further declines, whenever the Foreign Investors take their money back or the cost of imports increase.

The cost of crude oil is increasing for the last so many days, which in turn is increasing the demand for Dollar. Secondly, the Portfolio investors have started sending their money back which could be termed the Exit of Portfolio investment. This process has also increased the demand for Dollar and the value of Rupee is declining.

The chief cause of the Exit o Portfolio Investors could be the increase in the interest rates in America, together with an effort of the US Govt. to attract the investors with tax relaxations.

Clearly, there does not seem to be any weakness in the fundamental condition of the Indian economy.

For instance, the GDP is increasing though not as expected, the manufacturing sector is good and inflation is almost under control.

There the weakness of Indian Rupee seems to be due to Global reasons. This thing becomes apparent due to the fact that the value of several currencies of the World is also becoming weak and the plight of Indian Rupee is not an exception.

During the last three months, there appeared a great decline in the values of the currencies of BRICKS nations, with an exception of China where the devaluation was just 0.5%. In South Africa, it was 2.3%, India 4.4%, Brazil 7.0%, and Russia 5.3%. So India is lying in the middle.

Meaning of Devaluation of Rupee

The weakening of Indian Rupee is not a good sign for India. But the exporters become happy when the Rupee becomes weak as they get more Rupees for their exports. It is true that the weak Rupee gives a chance to India to bridge the business losses of the balance of trade. But the weak Rupee increases several other problems. The Imports become costlier and the inflation increases. The interest responsibility on the International loans taken by the business houses also increases in terms of Rupees. It is noteworthy that several Indian Companies have taken International loans due to the lesser rate of interest. They face deficits when the value of Rupee goes down.

The Indian public facing a jolt of increased petrol prices will face a double blow in the form of the decreasing value of Rupee.

How to Restore Rupee

It is true that it is not possible to stop the devaluation of Indian Rupee from the forces of the market. Because the control on the prices of crude oil, the policies of the US Govt. to attract investors and the Exit of Portfolio Investment is not within the powers of India.

India could manage the fixation of the Exchange rates of Rupee.

The value of Rupee starts becoming strong, whenever the supply of Dollar increases due to the fresh arrival of FDI to India. But then the RBI purchases the Dollar to stop the increasing value of Rupee. But when the same investors take their money back from India, then the RBI does not interfere as before. As a result, the value of Rupee goes on decreasing. The ups and downs in the value of Rupee only benefit the stock marketers to a great extent.

Now it has become an established fact the FDI’s often bring and take back the money. So these activities should not be allowed to make or mar the value of Rupee.

A buffer stock is created to check the instability in the value of agricultural products like corn and pulses. Here an effort is made to check the devaluation of such products when their supply increases. So the Govt. purchases the produce, stores it, and then sells it when the demand increases. Thereby the prices are controlled.

The similar method could be adopted in the case of foreign currencies. The Govt. should purchase the Dollars brought by the FDI’s and keep them in a buffer stock, and issue the same when the FDI leaves the country. In this way, the ups and downs in the value of Rupee could be checked.

Another measure is to put a check on FDI’s. The Govt. could impose taxes to stop them from transferring their profits out of India. It is called Tobin tax in economics.

A minimum time limit in the form of lock-in period should be imposed on the FDI’s and the Exit of Portfolio investors, so that they may not take their money out of India every now and then.