Fall of the rupee

The rupee is on a downslide. It is not a good omen for an economy like India, which is on a recovery mode after twin disruptions caused by demonetisation and hasty implementation of the GST. The Indian currency has already breached the 67 to a dollar-mark, which is a 15-month low. It is feared that the rupee will further weaken and may even plunge to 70 in coming months. It will, however, depend on the northward movement of international oil prices, expected rise in the US interest rate next month and further deterioration in the geopolitical situation. In all probability, Indian economy would have to face all these three challenges. The Modi government’s first reaction has been to freeze petrol and diesel rates. But, this calculated reaction will provide a temporary respite to the common man, who would face the brunt soon after the Karnataka Assembly election. This move will also nullify the petroleum sector reform and bring back the ominous oil subsidy regime where fuel prices were kept below market rates at the cost of the consumer, the state-run oil marketing companies and the taxpayers. Ideally, the Centre should have slashed levies on auto fuels and coaxed states to follow suit. 

 Normally, the falling rupee should have propelled exports because of a significant price advantage to Indian manufacturers in the international markets. But, India is caught unprepared. It does not have either qualitative or quantitative edge over its competitors, particularly China. Therefore, only miniscule manufacturers like software and pharmaceutical industries would reap the benefits of the weak rupee. The jewellery exports would be the net losers as value additions mostly take place in imported inputs. This exposes the limitations of the “Make in India” slogan, which needs to be revisited with all seriousness.

India has a significant foreign exchange reserve, but the RBI cannot supply dollars in unlimited quantities to hold the sliding rupee for long. Although Sensex is still in positive domain, several stocks would be under pressure as foreign investors in the Indian market are the net sellers. Growing trade deficit is also a matter of concern, which is at a five-year high. A comprehensive policy intervention is required before it is too late.