Saroj Kumar
It is also a difficult step for the RBI to increase the supply of dollars in the market, as the country’s foreign exchange reserves have gone below 600 billion dollars. It has a continuous declining trend. In such a situation, fiscal measures are the only way, which the government rarely implements.
Rupee is making a record of its weakness these days. He seems trapped in such a vicious circle of weakness, from which it is not easy to get out. On May 9, 2022, the rupee fell to a historic low of 77.41 against the dollar. The weakness is such that it has not yet risen above the level of seventy seven. This weakness is not a personal matter of the rupee, but its strings are also related to the economy and the health of the common man.
The reason behind the current weakness of the rupee is being told the Russia-Ukraine crisis and the increase in the interest rate of the US Federal Reserve. If these are both the reasons, then the expectation of strengthening of the rupee at the moment is meaningless, as redressal of both the reasons is not possible in the near future. The Federal Reserve is preparing to increase interest rates further. This dollar attack on the weak rupee will be painful. There are also domestic reasons for the weakness of the rupee, which are getting less mentioned. These are inflation and unemployment.
Both problems have long remained unresolved due to economic mismanagement, but are on the rise. In the age of globalization, the whole world is a market. Global trade is done in dollars, so to buy goods from any country, it is necessary to have dollars in pocket. Therefore, when the domestic currency weakens, one has to pay more for the dollar. As a result, the cost of purchasing or importing increases and the result is seen in the form of inflation in the domestic market.
The Ukraine-Russia crisis and the Federal Reserve’s interest rate hike are certainly big reasons for the rupee’s weakness. The supply chain has been disrupted due to the Ukraine crisis. The price of many commodities, especially crude oil, is skyrocketing in the international market. More dollars have to be paid for expensive crude oil. Due to this the demand for the dollar has increased and its value has gone up. The Federal Reserve, on the other hand, has raised interest rates by fifty basis points for the first time in two decades.
This has increased the attraction of foreign institutional investors (FIIs) towards the US economy. They consider investing in the US economy more secure than India’s volatile economic environment. Foreign investors have started selling strongly in the Indian stock market. So far this year, FIIs have sold Rs 1.3 lakh crore. This trend is continuing and is likely to continue. The demand for the rupee further decreased due to the selling of FII, the rupee reached the abyss on May 9, while the dollar reached the highest level of twenty years.
The phenomenon of rupee depreciation is not new. It has a long history, dating back to 1966, when the rupee was first pegged against the dollar. At that time the value of rupee was equal to dollar. Prior to this, the rupee was linked to the British pound. After independence, till 1966, the price of one pound was fixed at thirteen rupees. In 1944, the Bretton Woods Agreement was signed, in which India was also a participant. Under this, any member country had to decide the price of its currency against gold or dollar on its own.
Meanwhile, in 1967, India had to face economic troubles and to deal with the crisis, the government for the first time reduced the value of the rupee to seven and a half rupees against one dollar. The Bretton Woods Agreement broke in 1971 and India switched to a fixed rate system instead of the equivalent valuation system. This valuation system was linked to the British Pound Sterling. The linkage to a single currency was disequilibrium and disadvantageous, to counter which in 1975 the rupee was linked to a basket of multiple currencies.
The Soviet Union broke up in the eighties and the economic crisis in India returned once again. RBI once again devalued the rupee by 11 per cent in 1991. With this, India moved out of the fixed rate system and joined the market based currency rate system. As a result, the value of rupee fell to Rs 25.92 against the dollar in 1992. By 2002, the rupee had come down to Rs 48.99 against the dollar. In 2007, the rupee rose for the first time and reached 39.27.
At that time the stock market was in seventh heaven due to the continuous inflow of Foreign Direct Investment (FDI). But the 2008 global recession caused the rupee to fall to Rs 51.57 against the dollar by 2009 and by 2013 the rupee reached a level of Rs 56.57. After this, the demonetisation of 2016 proved to be an abomination for the rupee, when its price reached a record low of Rs 68.77. The pandemic of 2020 brought the rupee further down. The rupee hit a historic low of 76.67 in March 2020 and 76.98 in March 2022. May 9, 2022 proved to be a dark day for the existence of the rupee.
However, there is also a side of strength in the weakness of the rupee. The RBI had reduced the value of the rupee twice in the past for the same strength. The strength of the current weakness of the rupee is hidden in the export of those goods and services, in whose production the role of imported raw materials or parts is negligible. Sectors like software, textiles and agriculture can take advantage of this. Since India imports more, the loss due to the weakness of the rupee is going to be more. In the financial year 2021-22, the country’s imports stood at $611.89 billion, while exports stood at $419.65 billion. That is, the country’s trade deficit increased to $ 192.24 billion in the financial year 2021-22, which was $ 102.63 billion in the financial year 2020-21.
It is necessary to stop the depreciating rupee. But there is no solution in front. As a policy measure, RBI tries to increase demand for rupee by reducing liquidity in the market by raising interest rate, sells dollars from foreign exchange reserves to increase supply of dollars in other markets. But the RBI’s move to hike interest rates has proved futile, as the rupee’s historic devaluation occurred after a 40 basis points increase in interest rates on May 4. It is also a difficult step for the RBI to increase the supply of dollars in the market, as the country’s foreign exchange reserves have gone below 600 billion dollars. It has a continuous declining trend.
In such a situation, fiscal measures are the only way, which the government rarely implements. She has gone this way long ago. If work had been done on the inflation, unemployment front, the economic environment would have remained stable and foreign investors would have remained confident in the Indian market. But due to wrong economic policies, where the income of a handful of people increased even during the epidemic, the income of ninety-four percent decreased. Due to the fall in earnings, the demand in the market fell and the economy got stuck in a vicious cycle. The government also did the work of increasing the indirect tax on this. Due to this the economy staggered further.
The time is still to increase the direct tax on the big earners and also the corporate tax. Inflation should be brought down by reducing indirect taxes. This will increase demand in the market, create jobs. If the economy stabilizes, the confidence of foreign investors will increase. Rupee will strengthen. Otherwise, it is difficult to say when the morning will be in the dark night that the rupee is in.