The Falling Rupee

In the last few days, the business news is all about the falling rupee. For every US dollar, we now need 60 Indian rupees. Last year around the same time, each US dollar was equal to 50 Indian rupees. Thus over the last one year, either the US economy is moving towards stability or Indian economy is slipping into a recession.

Booming US economy – There are indicators that the US economy is on its way to prosperity, with the unemployment figures going down. There have been reforms, especially with the immigration that has buoyed up the prospects of employment figures rising in the coming months. Otherwise there is not much of an indication that any of the US events has triggered the fall of the Indian rupee. If that was the case, the US dollar would have risen in proportion to the other currencies as well. 

Slipping Indian Economy – It is definitely a case where the flaws of the Indian economy are affecting the value of our currency. Major economies around the world face the cyclical changes which occur due to the nature of the business. None of the businesses or economies can escape the cyclical changes. They have to be mitigated as they occur. Emerging economies (like India) are more impacted by structural flaws. Structural flaws show up in each aspect of the government functioning. Corruption impacts all of us. Starting a firm or a new business is difficult. However Indians have shown that they are capable of overcoming the structural flaws to achieve their goals. But in the last few years, we have been stuck with policy paralysis. There has been hardly any reforms that has brought cheer to the Indian businesses or the foreign investors. This has reduced the foreign investments made in the country. The two main causes of concern are – (1) foreign currency coming into India for investment has reduced and (2) Indian currency is now moving out for investments in other countries that are friendly to businesses with policy and tax reforms. Foreign investors are clearly not interested in purchasing the rupee. Indian investors are looking to exchange the rupee for foreign currency needed to set up business in other countries.  The demand for the Indian rupee has gone down. Supply of the rupee is more than the demand for the rupee. And thus the value of the rupee stands depreciated.

Comment – If this situation is not corrected soon, there may be further erosion of the value of the rupee against major international currencies. This impacts all of us. It brings inflation, which when tamed is good for the economy but if it demonizes, can cause big damage. India needs reforms that will help companies and foreign investors set up business in India. India needs reforms that will encourage entrepreneurs to set up business. India needs reforms that will encourage people to work hard and earn more. India needs reforms that will encourage its population to spend a portion of their earnings. Reforms will contribute to the development of the country. One should not look at the depreciation of the rupee as a cyclical and stand-alone change. It is more a structural change. And it needs correction.

–Sachin

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