Rupee Free Fall: Cause and Consequence

In a rather informal lingo, the current scenario is being described as a period when necessity and luxury have come to the same level as far as their prices are concerned. This equation has its backdrop in the scenario wherein the price of onion, a bottle of beer and the value of rupee against the dollar are almost on comparable terms. All of them are hovering to form the equilibrium around the Rs. 75 mark.


The rupee has been experiencing nearly a free fall in the past couple of weeks creating a havoc in the financial markets and raising a panic for the Indian economy. The panic is more pronounced considering the fact that India as a whole is a net importing economy.


If we analyse the core of this issue, we encounter many theories put by the pundits of the game, citing reasons ranging from political to criminal. The mayhem began when the US Federal Reserve, the American equivalent of RBI, announced the phasing out of easy monetary policy. In simple terms, if we remember, the West is reeling under recessionary fears with GDP growth occurring in decimals less than unity. However, the recovery process in the US has been comparatively encouraging over the past three financial quarters and as such it is returning into its legacy as an attractive investment decision. It is important to note here that approximately $88 billion was the value of the capital inflows into India in the financial year 2012-13. A majority of this portion was invested in the Indian equity markets like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Now that the Fed has announced a phasing out of easy money, this means that the dollars which it had printed and released into the American economy in the form of stimulus packages will be rolled back in a gradual manner. As such, it will be buying back the dollars it had sold. This has given rise to an increase in the demand for dollars as there is a buyer in the form of Fed. Now, the question is where are the dollars which the Fed had printed and released into the American economy?


Most of this money had been invested into Asian economies, particularly India. Since, the investors are now willing to sell these dollars to the Fed, they are withdrawing the money invested in these emerging economy markets. As such, the rupee is experiencing a free fall as it is not in demand but its exchange currency, the dollar, is in high demand. Apart from these economic theories, there has also been a speculation that with the general elections approaching in 2014, the rupee has been artificially depreciated to bring election funds from overseas. The so called policy paralysis is also an issue.


The consequences of a falling rupee are what trouble the common man of India. As India is predominantly a net importing nation, a falling rupee means the government needs to pay more currency in rupee terms for the same value of dollar. For example, if a month ago, the price of an item was one dollar, the government needed to pay Rs 54 but now it will need to pay somewhere around Rs. 65, an increase of around 20%. The industries like foreign travel and foreign education have been severely wounded as people and students will now need to pay the same course fee but at a higher price in terms of the rupee. However, the most menacing factor is the oil import bill, which constitutes about 35% of the total import bill. India imports about 83% of its crude oil requirements. To run our cars on the road and the LPG cylinders in the kitchen, this is an unavoidable penalty to be paid. The government which was paying Rs 5,400 per barrel (assuming oil prices to be $100 per barrel) only a month ago has to now shell out Rs 6,500. As such, the government raises the prices of these fuels like petrol, diesel and LPG. The price of diesel has a cascading effect on the economy. As most of the food and daily consumables are transported by road and track on trucks and rails, diesel is the major consumption to keep operating this network. A high diesel cost will increase the transportation cost which will in turn increase the cost of food or the item transported leading to inflation.


However, all is not bad for a falling rupee. The IT and the services sector which constitutes nearly 25% of our GDP is set to gain from this phenomenon as the value of most of these exports will bring higher revenue in rupee terms. Similar is the case with other exporting industries like engineering goods and services.


Hence, the current crisis not only calls for an economic solution amicable to all the sections but the need to think of a long standing solution which can overcome the petty barriers of short term political gains.


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