Should We Not Worry About the Falling Rupee?

The turmoil in the Forex market continues and with it the collapse of Indian currency rupee. The Indian currency rupee breached the level of 70 against US dollar for the first time in its entire history. And this fall isn’t finished yet. The chances of it falling further are high.

In the aftermath of this fall and panic that is ensuing, Modi government seems unperturbed! Modi’s economic affairs secretary Subhash Chander Garg said this about the falling rupee: the fall in rupee was due to external factors and there was no need to worry at this stage.”As currencies of other economies are also depreciating, intervention by the Reserve Bank of India (RBI), by selling dollars in the country, will not help much at this stage for stabilising the rupee. Even if the rupee falls to 80, it will not be a concern provided all other currencies depreciate.

PM Modi and his team will not worry even if rupee falls to the level of 80! What is the truth behind his statement that rupee is falling only because of external factors and that we should not worry about the weakening rupee, even if it breaches 80 mark, because other currencies are also falling?

First, rupee’s exchange rate against other currencies is determined by its demand and supply. The supply is created by the Indian central bank RBI at the orders of its master government. The main function of RBI is to print currency for the government to fill the gap in its mammoth budget. The name that RBI uses to create rupees out of thin air is monetary policy. Now, rupee’s higher supply in relation to other currencies will depreciate its purchasing power. Also, its lower demand will do the same. Higher supply combined with lower demand will speed up the depreciation. In the present situation both these factors are working to weaken the rupee, and these factors are purely internal in nature. It has nothing to do with the external factors.

Since its inception, RBI is printing and creating rupees out of thin air at a breakneck speed to monetize governments’ deficits. Indian welfare state governments are big spending machines. To win votes political parties launch myriad programs e.g., since coming to power Modi government has launched programs like Make in India, Jan Dhan Yojana, Mudra Financing Scheme, Pradhan Mantri Awas Yojana, MNREGA continues with increased budgets, Swacch Bharat Abhiyan, Pradhan Mantri Ujjwala Yojana, Atal Pension Yojana, Bullet Train Project, Smart City Program, Ayushman Bharat (Modicare) etc. etc.,  and endless public infrastructure programs. Modi is busy doling out free goods to poor people to win votes for coming 2019 elections. From where all these rupees are coming or are going to come for these programs? From RBI’s printing presses. This increased supply of rupee is also entering the Indian stock markets and they are ballooning. The bubble is now reaching its heights, and ready to crash. The Indian stock market is one of the costliest market in the Asian region. As long as dollar was weak, all these printing and spending programs looked good.  But now that the dollar is strengthening, because the US Fed has started increasing its interest rates, the rupee and other currencies are coming crashing down because of their fundamental weaknesses.

Second, we should really worry about the weakening rupee because, remember, India is a net importer country. Its exports are tiny to the world markets. Its economy heavily depends on the imported oil without which its economic engine cannot run. And, this oil it has to buy in the international market by exchanging dollars because oil trades in dollars. Dollar is the world’s international currency and reserve at this point of time. The fact that rupee is falling but other currencies are also falling gives little comfort because dollar isn’t falling. It is strengthening rapidly, and that is the cause of the worry.

Strong dollar, combined with rising oil prices and imports, is already widening Modi government’s trade deficit. Weakening rupee also means higher prices of everything in India. Indians are already facing very heavy bouts of inflation. Prices of petrol and diesel are reaching their all time highs. With continuously weakening rupee these prices will go even higher. Not only oil, India is also world’s biggest consumer of gold. Gold is its second biggest import item. Gold also trades in dollar in the international markets, and that will further exacerbate problems.

Weakening rupee, rising oil prices, and rising protectionism in India means huge problems are staring in our faces. As we said earlier, these issues can create an economic problem that will dwarf the problems of 1990s. Only economic ignoramuses and irresponsible people cannot worry about these problems. Notwithstanding Modi and his ministers, Indians must seriously worry about the weakening rupee because it is a matter of their life and death.

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