Exchange Rate Fluctuation in USD and INR
The issue of rupee depreciation against the US dollar has been in the news for a long time. Now that our current RBI governor, D. Subbarao, steps down on September 4, 2013, it will be an utmost pleasurable sight to watch the successor, Raghuram Rajan, either bring the economy back from the dead or struggle to make things right, face criticism from economists about the policies, watch the currency growing weaker, and then, as usual fail. In the end, to comment that the finance minister would one day thank God that RBI existed.
The very thought that I had once been a witness to a time when one dollar was equal to merely fifty rupees, now seems unreal. With the rupee depreciating dramatically, and reaching an all time low of Rs. 68.825, it is not a far fetched situation when one dollar would cost seventy Indian rupees. It has been following a vagarious nature between Rs. 63 to Rs. 68 since two weeks. The depreciation figure is 13% from the beginning of April. Many of you may think why is so small a change, such a great hype? The answer lies in the volume of transactions that takes between countries. After this episode, our imports are costlier, people have to pay more for foreign trips and overseas education etc. The figure of our oil imports rose by two lakh crore rupees just because of it.
Why did this happen in the first place? There are a lot of reasons for it but the major were:
1. Increasing Current Account Deficit (CAD)
The positive gap between the money value of imports and exports of a country of goods and services in the Balance of Payments (BOP) Account refers to the Current Account Deficit. The fiscal deficit or the borrowings made by the country is healthy in case of developing nations like India. But in the FY 2012-13, the CAD was 18.1 billion USD or 4.8% of the GDP in the year ended March 31 which is an alarming situation.
With the Food Security Bill been passed by the parliament, that aims to provide highly subsidized food grains to 70% of the population, this deficit is likely to sky rocket in the near future. The Commerce Minister recently enlightened the people with the fact that ever since the coal scam was exposed, the commodity till date is imported which adds to the deficit. Also, speculation pressurizes the currency exchange rates.
Money invested in gold is another challenge faced by the government as it blocks the movement of funds in the economy and therefore fails to create more national income. Thus, growth rate slows down and for this reason, investment in gold is termed as unproductive by many economists.
2. Low Forex Reserves
The foreign exchange reserves being held by the country have fallen to such a low that it can barely finance the imports of the next seven months. During the Indian policy crisis of 1991, it had reserves that payment could be made for the imports of just three weeks. Indeed, history repeats itself.
3. Investment Issues
The growth rate of the economy for this quarter has been 4.4%. Moreover, since RBI cut down its growth forecast from 5.7% to 5.5%, the foreign investor confidence has shaken till the roots. Consequently, they are withdrawing their money from the Indian market. Insufficient FDI inflows like from that of Walmart increases our woes. As our deficits were financed by this money, the situation is triggering apprehension about the Indian economy.
4. US Back on Track
After the recession, the American economy is reviving and therefore the currency is strengthening against others. It may also discontinue providing the stimulus package to countries which argues that the recessional impact can be reduced with increased governmental expenditure.
What is government and the central bank doing for it?
Both of them are putting their toil to reduce the capital outflows, but unfortunately prove to be a fish struggling to survive without water. Similarly it has implemented every hit and trial method to arrest this situation. Some of these are:
1. Import Duty on Gold
The government imposed a 10%import duty on gold on August 14,2013 so as to reduce the investment in gold. But it didn’t help.
2. Capital Outflow Control
Our governor has slashed the amount that domestic companies can invest overseas without the approval from 400% to 100% of their net worth. People can now remit only 75,000 USD from 200,000 USD in a year.
3. Indecisive Policy Actions
One day RBI says that it will squeeze out the liquidity in the economy, the other day it intends to inject one billion USD. It also proposed to increase the tax slab to 35% for the super rich people, but the plan was chucked off the very next day. RBI has also increased the interest rates on loan for the same purpose. It has exempted the banks that accept deposits in foreign currency from the maintenance of the 4% cash reserves. It has been putting in efforts to tighten cash supply in the country.
A recent change that took place was an approximately Rs. 2 hike in the petrol prices, and in order to cut down the oil consumption of the country, the petrol pumps will be functioning from 8 am to 8 pm. It will be incorrect to say that the institutions are not taking steps to curb the problem, but all that I could infer from the given scenario is that, these steps tremendously lack a direction.