The Fall of the Indian Rupee: the story behind the collapse of the Nation’s Currency
The Fall of the Indian Rupee: the story behind the collapse of the Nation’s Currency
In recent times, the Indian rupee has become an important issue for financial analysts and political leaders alike. The massive fall of the Indian rupee in 2014 has continued to attract its fair share of critics and media attention. In the past few months, the rupee has withstood the US tapering news and got support from FIIs. But most analysts discuss how the general elections may influence the status of the Indian rupee as well. Many market participants are keenly interested in the formation of a stable government. There are many questions regarding the future of the Indian rupee and whether it will hold firm in the coming months. While India is experiencing considerable growth in certain sectors, the story has stalled for some months now. China is our closest rival and we continue to face a slowdown in key sectors such as manufacturing and production compared to them. Our GDP growth has also not been much to write about in recent times. India has also lost out to China when it comes to the ease of doing business.
The World Bank’s Ease of Doing Business Index has placed India 38 countries below China. Into this disheartening state of affairs comes the shaky status of the Indian rupee. Bogged down by power outages, corruption and lack of infrastructure, India is floundering on the brink of disaster when it comes to economic growth. After the financial crisis forced investors all over the world to look for stable growth conditions, India lost out on a huge amount of foreign funding. Investor confidence fell and the rupee lost its value. The rapid fall in the value of the rupee in present years is due to a number of complex factors. The massive trade balance deficit and falling levels of FDI have done considerable damage to the rupee. Since the 2008 spike, India has also been hampered by the ICE Brent crude prices. Import curbing measures in 2013 have also added to the conundrum. The US is India’s largest trade partner when it comes to exports in terms trade value.
From the start of the financial year in 2012 to September 2013, US contributed to 14% of Indian exports. The condition in the US has changed now. In a zero sum condition, a good return to growth and investment in the US impacts India in a massive way. If the Indian rupee has to gain value again, risks for investing in the Indian economy have to be lowered. The rupee is likely to remain under a lot of pressure unless the there is a rise in exports following growth in US and the RBI raises rates. A tightening of credit conditions is also likely to influence the rupee in either direction. If the system is overleveraged and there is improper risk management, there will be an even bigger pullback in FDI. This could also impact the rupee.
The government continues to spend excessively during election times. This could also cause the rupee to depreciate. The FII have been selling index futures and the equity market in India is also weak. There is a heavy demand for the dollar and this is harming the value of the rupee. The economic situation is also looking dismal and this is certainly not working in the favour of the Indian rupee either.
The high current account deficit and the uncertainty regarding the central bank’s stance on monetary policy are also adding fuel to the fire. FIIs have sold billions of Indian debt and equities in recent times. Though the situation regarding FII inflow is improving now, the big question is how soon will this impact the value of the rupee in a positive way? The main reason behind the fall of the rupee has been the huge strength of the dollar. The dollar has touched a 3 year high in recent times. The record breaking performance of US equities and improvements in the labour market have also boosted the US economy and this has changed the way the rupee is valued too.
All that glitters may not be gold but the US dollar is as good as gold in recent times. The Federal Reserve is even approaching issues such as tapering asset purchases and bolstering their economy further. The Indian economy is a direct contrast to this. India needs to initiate structural reforms in a massive way. They also need to bridge the divide between the imports and exports. Only then will the rupee emerge from its downward spiral and move on to the better position.
