THE plunging Indian rupee might have sent investors in the stock markets scurrying for cover last week, but government leaders and various business heads have tried to soften the impact of the currency’s sharp fall on the domestic economy.
Last week the rupee plunged to a lifetime low of 70.09 against the United States’ dollar, with fears that the US-Turkey imbroglio could result in global investors pulling out funds from emerging markets including India, South Africa, Argentina, Mexico, Brazil, Indonesia and Russia.
Currencies of all these major emerging economies fell sharply last week. The South African rand had its biggest single-day fall in a decade, but currencies of other emerging markets also plunged to record lows.
Even the Sri Lankan rupee dipped to a near record low and has plunged by more than four per cent this year. India is one of its major trading partners and any impact on the Indian currency has its impact on the Lankan rupee.
The Indian currency, too, has been on a downward spiral this year. At the start of the year it was ruling at 63.67 to the US dollar, but it has dipped sharply during the year. And from April, the start of its new financial year, the rupee has fallen by 6.7pc against the US dollar.
Of course, government leaders have been assuring the public and the markets that things are not that bad with the economy. Finance Minister Arun Jaitley, who is recovering from a kidney transplant, asserted last week that the country’s macro fundamentals remained resilient and strong.
“India’s foreign exchange reserves are comfortable by global standards and sufficient to mitigate any undue volatility in the foreign exchange market,” said Jaitley.
The developments in the currency market were being monitored closely to address any situation that might arise in the context of the unsettled international environment, he added.
The rupee fell primarily because of developments relating to Turkey, which had resulted in risk aversion towards emerging market currencies and the strengthening of the dollar, he said.
Even the economic affairs secretary, Subhash Chandra Garg, tried to underplay the fall of the rupee against the dollar. “Rupee is depreciating due to external factors… nothing at this stage to worry about,” he said. The Indian currency was much better than other currencies.
And of course, the Reserve Bank of India (RBI) had sufficient foreign exchange reserves, noted Garg. The central bank’s foreign exchange reserves were above $400 billion, and it is not targeting any specific level for the rupee.
Rajnish Kumar, chairman of the State Bank of India— the country’s largest bank—feels that the rupee should stabilise between 69 and 70. While the rupee has fallen recently, it is not significant in comparison to what other currencies have suffered of late, he added.
Kumar believes that if the rupee stabilises around 70, foreign investors will find it attractive and may bring in more funds.
Of course, there have been critics of the government’s policy relating to the rupee. Congress leader Rahul Gandhi said that “the Indian rupee just gave the Supreme Leader a vote of no confidence, crashing to a historic low.”
FOR the National Democratic Alliance (NDA) government led by Prime Minister Narendra Modi, the fall of the rupee could not have come at a worse time. General elections are due to be held next year and many states — including key BJP-ruled ones such as Rajasthan, Madhya Pradesh and Chhattisgarh — will see voting later this year.
The price of petroleum products, a range of imported commodities, engineering goods and electronics will soar with the weakening rupee. The government also wants to raise more than $85bn in the current fiscal to fund the fiscal deficit.
Last month, the country reported a fiscal deficit of Rs4.29 trillion in the first quarter (April-June), which is nearly 70pc of the budgeted target for the fiscal. Of course, the gap is lower than over 80pc in the first quarter last year.
But the trade deficit in July burgeoned to top $18bn, a five-year high, as petroleum imports surged by more than half as compared to imports in July 2017. India imports more than two-thirds of its oil and petroleum requirements, which have been soaring of late along with the global price of the commodity.
While exports grew at a healthy 14.32pc to $25.77bn, imports rose by nearly 29pc to $43.79bn, resulting in a hefty trade deficit. This is the highest since 2013, when it had touched $19.37bn.
Despite these challenges, India’s economy is expected to grow at 7.4pc in the current fiscal. The Federation of Indian Chambers of Commerce and Industry (FICCI), in its latest Economic Outlook survey forecast an annual median gross domestic product growth of 7.4pc, with a minimum and maximum range of 7.1pc and 7.5pc, respectively.
According to the FICCI report, the projection is in line with the estimates put out by the RBI recently. “Majority of economists believed that the fair value of the Indian Rupee vis a vis the US dollar would be in the range of 65 to 66,” said the survey, which obviously did not foresee the Turkey crisis.
The Indian currency has seen worse times in the past. About five years ago, it plunged from 54 to the US dollar to 68 in just four months. The RBI had to raise interest rates by 200 bps to support the currency and attract foreign capital.
In fact, the rupee was bracketed in 2013 as part of the “fragile five economies” — the others included Brazil, South Africa, Indonesia and Turkey — with high current account deficits.
Interestingly, it, too, had happened just a year before general elections in the country. Fortunately, analysts do not see any direct link between a failing currency and general elections around the corner.