From the editor-in-chief – Editor’s note

Many associate the exchange value of their currency with national pride. This is a misconception as exchange rates can vary due to factors beyond a country’s control, such as the war in Ukraine this time. However, they reflect the strength of a country’s economy at some level, even though they are largely determined by market forces. A weakening rupee means investors are selling their assets in rupees for dollars, and they do so for a variety of reasons. A falling rupee means that our exports are becoming more competitive in sectors where our import content is low. But our imports are becoming more expensive and we are an import-dependent country, especially for essentials like petroleum, fertilizers and edible oils.

Central banks closely monitor the exchange rate to avoid undue speculation and its wild fluctuations. The Reserve Bank of India (RBI) appears to have had a psychological benchmark of 80 for the Rupee against the Greenback. The fear was that if the rupiah broke through this level, it could precipitate a steep downward spiral, leading to major disruptions in the economy. This danger mark was briefly breached on July 19 before the RBI intervened to lower the rate to Rs 79.95. However, the next day, the rupee slipped again, this time closing at Rs 80.05 per dollar.

Union Finance Minister Nirmala Sitharaman was right to allude in a written statement to Parliament to global forces beyond India’s control. The Russo-Ukrainian war in late February was a major event that sent world prices for fuel, food and fertilizers skyrocketing and disrupted all major markets. Then, in May, the US Fed launched a series of aggressive interest rate hikes to quell inflation, prompting a flight of foreign portfolio investment from India. This calendar year, REITs sold a record $30.92 billion worth of Indian assets.

Sitharaman is also right when she says that currencies have fallen like nine pins across the world. The Turkish lira has lost 22.34% of its value since December 2021, the Japanese yen has fallen by 16.95%, the pound sterling by 13.66%, the euro by 11.30% and the Thai baht by 8 .75%. The 6% drop in the Indian rupee, on the other hand, looks moderate. But if the finance minister appeared defensive, it is because the ruling BJP has in the past been liberal in its attacks on the UPA regime on this front, particularly in 2013, after the rupee depreciated sharply due to the Taper Tantrum caused by the US Fed. slowdown in its bond purchases. Narendra Modi, then chief minister of Gujarat, had equated a weak currency with a weak government. Now the boot is on the other foot, with Congress leader Shashi Tharoor sarcastically remarking, “What has this strong government given us? An even weaker rupee!

That the Modi government was worried about the fall of the rupee was evident in the RBI’s aggressive moves to shore it up. He tapped into India’s vast foreign exchange reserves and bought rupees to stem its slide. Since February, the RBI has spent up to $50 billion on this and reserves have fallen from $630 billion to around $580 billion, which is still considered a comfortable level. However, we should not fool ourselves about our foreign exchange reserves because a large part of them represent speculative money which can be withdrawn at any time, as we have seen recently. We need to have foreign exchange reserves that our exports bring in and that stay here. Politically, the fall of the rupee is not good news for the ruling regime: it is already causing widespread disruption in government finances and business plans and bringing misery to the common man.

As Associate Editor Shwweta Punj discovered while writing this week’s cover story, the real worry is what experts call “imported inflation.” In fact, Crisil’s chief economist, Dharmakirti Joshi, speaking to our Board of India Today Experts (BITE) section, said it now contributes up to “60% of WPI inflation, compared to a average of 30% over the past five years. ”. Consumer goods made primarily from imported components – think of smartphones, automobiles, air conditioners and other products ubiquitous in our urban markets – are becoming increasingly expensive. The same goes for foreign travel and study abroad, especially in the United States. Public finances are also under severe pressure. India is a net importer – its oil import bill doubled to $119.2 billion in 2021-22 from $62.2 billion the previous year. Ultimately, the government will either have to pass the pain on to the consumer, risking further public anger, or absorb it and see it ripple through other parts of its balance sheet. Similarly, this year’s budget had earmarked an additional Rs 1.10 lakh crore for its fertilizer subsidy, raising it to Rs 2.15 lakh crore this financial year. Expect this to inflate further, given the combination of high prices and a falling rupee.

On the industry side, the impact is mixed. Most businesses worry about rising import bills and higher cost of servicing loans. A Crisil study of more than 300 companies showed profitability fell 200 to 300 basis points in the June quarter from a year ago. But for exporters, especially those who can tap into domestic raw materials, it may be time to rejoice. The computer sector, textile manufacturers and automotive component manufacturers, to name a few, have seen an increase. The experts on our BITE panel – Principal Economist NR Bhanumurthy, ICRA Chief Economist Aditi Nayar, FIEO DG and CEO Ajay Sahai, who speaks from the exporter perspective, and Joshi – seem keen to qualify the easy assumption that exports will benefit, although . “The conventional view needs empirical verification,” says Bhanumurthy.

Many experts believe that the RBI should stick to volatility management and let market forces decide the fair value of the rupee. Others believe the weakened rupee is symptomatic of India’s inefficiencies. DK Srivastava, Policy Advisor for EY India, believes that India should strive to increase its productivity and efficiency. “Currency should have asset value rather than just exchange value,” he says. There is no doubt that Indian industry needs to become more competitive and export more. In 2021, estimated output per worker was worth just $6,413, compared to $16,697 in China. Much depends on business-friendly policies and improved infrastructure. The flip side is to aggressively pursue aatmanirbharta to reduce our import dependencies. The fall of the rupee should be a wake-up call for the government to speed up economic reform.

— ENDS —

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