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Free fall

With the rupee hitting an all-time low of 72.98 against the US dollar on September 18, The Indian Express examines what a weak currency means for the national economy — and personal finance.

Written by George Mathew |
Updated: September 23, 2018 5:52:40 pm
Rupee, Rupee depreciation, IMF, Rupee against dollar, India economy, Indian Express news The crux of the problem is that India’s macroeconomic framework is based on an antiquated belief that the economy is closed when in reality it is far more open.

In 1947, the value of one rupee was said to be equivalent to one dollar. There’s another theory, though — that one dollar was, in fact, equivalent to Rs 4 since the Indian currency then was pegged to the British pound sterling. Over the decades, the rupee has been on a roller coaster ride until last week, when it plunged to an all-time low of 72.98 against the US dollar.

In the Indian political discourse, a strong rupee has often been associated with economic muscle. In August 2013, when the rupee came under attack during the fag end of the UPA government’s second term, Sushma Swaraj, then sitting in the Opposition benches, tweeted: “The rupee has lost its value. The Prime Minister has lost his grace.”

The rupee had then weakened by 17% in over three months — between May and September 2013 — after Ben Bernanke, chief of the Federal Reserve, indicated that the US was going to taper its purchase of assets such as bonds.

More than a decade earlier, during the Asian crisis of 1998, then RBI Governor Bimal Jalan had to seek the intervention of PM Atal Bihari Vajpayee to rein in his Cabinet colleagues who were advocating a stronger rupee.

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So what does a weak rupee mean for the country and the economy, and are demands for a muscular currency mere political expediency or the need of the hour? And what causes a rupee to weaken or strengthen?

Why the drop

For three years, the rupee defied conventional wisdom to grow steadily, until the big fall this year — a 15 per cent drop in calendar year 2018. The rupee has weakened despite the RBI pumping in $25 billion into the market this year. The central bank usually sells dollars from its over $400 billion foreign exchange reserves in order to defend the currency.

The fall in the rupee can be primarily attributed to global factors. One, rising crude oil prices, primarily because of US sanctions on Iranian exports and a drop in Venezuela’s production. India, which imports over 70 per cent of its oil needs, spent USD 87.7 billion or Rs 5.65 lakh crore on importing 220.43 million tonne (MT) of crude oil in 2017-18. A costlier import oil bill meant the currency taking a further hit.

The double whammy of a weak rupee and higher crude oil prices has led to a sustained rise in fuel prices in India, with petrol prices crossing Rs 90 per litre in several cities.

Second, the dollar has been strengthening thanks to a robust economic recovery in the US. The US Federal Reserve’s steady hike in interest rates has made investments in US treasuries more attractive, thus resulting in funds moving out of emerging markets such as India.

“Interest rate hikes by the US Federal Reserve have resulted in a flight of capital from emerging market debt and equities. The economic crisis in Turkey and Argentina, and trade tensions between the US and China have also soured the global risk sentiment and dampened the outlook for emerging market assets,” says Abhishek Goenka, CEO, India Global, a leading foreign exchange advisory firm.

Another way India’s current account deficit (the country runs a higher import bill than what it earns through exports) could have been bridged was through portfolio inflows to Indian capital markets — or money which foreign funds deploy to buy stocks or debt of Indian firms. However, that is an uphill climb since foreign portfolio investors (FPIs) have been pulling out funds from Indian markets. Data from the National Securities Depository shows that FPIs took out Rs 15,366 crore from debt and equity markets in September, and Rs 55,828 crore in the 2018 calendar year so far.

Heads or tails

A fall in the currency impacts the common man as prices of fuel, imported items, goods produced in India with raw materials imported from abroad, are likely to go up. But a weak currency also boost exports. So who wins or loses during this roller coaster ride?

The economy

The rupee has often been weighed down by several factors, among them the demand and supply of foreign currency. For instance, if an Indian company has to import computer chips worth $10 million from the US, it has to pay in dollars. For this, the importer needs to shell out Rs 72.2 crore at the current exchange rate of Rs 72.20 to get $10 million. In January this year, it would have cost only Rs 63.50 crore to buy the same quantity of chips as the rupee-dollar rate was then around Rs 63.50.

Essentially, as the country’s demand of foreign currency goes up — through import of goods and services, for travels abroad, overseas investments, for repaying debt, medical treatment abroad etc — its currency chest gets depleted. Of course, there are ways to fill it back — through export earnings, foreign investment in Indian firms or stocks, remittances and overseas borrowings.

But India’s twin deficits — a widening current account at $45.7 billion for the quarter ended June 2018 as compared to $41.9 billion a year ago, according to RBI data; and a growing fiscal deficit (excess of government spending or borrowings over revenues) — mean that the currency ends up taking the hit.

Overseas travel

Take the case of students going abroad. If a student had secured admission in a US university in January this year, his tuition fee of US $50,000 would have worked out to Rs 32.37 lakh at the 64.75 dollar-rupee exchange rate. But with the rupee now crashing to 72.98, the fee will rise to Rs 36.49 lakh and the student will have to arrange for an extra Rs 4.12 lakh.

According to RBI data, in 2017-18, Indians going abroad to study took out foreign exchange worth $2.021 billion (around Rs 14,400 crore). This is set to soar as the reversal of the rupee’s slide is not likely in the near future.
In 2017-18, Indians spent over $4 billion (around Rs 28,000 crore) towards expenses on travelling abroad, according to the RBI data. Now, with a weakened rupee, an overseas vacation will be more expensive. That’s also the case for many Indians who remit money abroad for maintenance of relatives and medical treatment. In fact, after the RBI eased norms on foreign exchange in 2014-15, there has been a sharp rise in remittances from India under the Liberalised Remittances Scheme. Remittances jumped 755 per cent from $1.325 billion in 2014-15 to $11.33 billion in 2017-18.


A slide in the rupee should keep firms who export happy as their products become more competitive — as is often the case with textiles, leather, gems and jewellery. Besides, individuals receiving funds from abroad stand to benefit. Also, the stocks of Indian software companies, which bill their clients in foreign currency, tend to head northwards when the rupee tumbles. Thus, a depreciation of the currency has been advocated in the past by some to boost export growth.

However, it may not be that simple. “Efforts to lift exports and contain imports will help to correct trade imbalances. It is believed that a weaker rupee versus the US dollar is a boost for India’s trade competitiveness. However, a weaker rupee is an ineffective and insufficient driver to boost exports. In fact, India’s exports are more in sync with world imports or global demand trends rather than a weak currency,” says DBS Bank economist Radhika Rao.

Experts argue that some depreciation in line with other currencies is essential to keep India’s exports strong. Export sectors such as ready-made garments have been declining for more than a year, falling over 12 per cent during the April-August period. The US has challenged India’s export subsidy regime at the WTO, making it difficult for the government to come out with more sops for exports. Which means, exporters are not quite celebrating.

Besides, GST-led disruptions, coupled with a weakening of major currencies across emerging economies, have restricted exporters’ ability to capitalise on a weaker rupee. The yuan has depreciated by 5.24 per cent against the USD since January 2018, while the Indonesian rupiah has depreciated 6.81 per cent, says an analyst with India Ratings.

What next

There are only five major emerging market countries running a basic balance deficit and India is one of them.
According to ABans Group chairman Abhishek Bansal, the rising current account deficit (CAD) is adding to the pressure. “We may see an undesired knee-jerk reaction on import bills as rising fuel prices inflate prices of goods and services in the long run,” he says.

While seeking to play down the currency volatility, Union Finance Minister Arun Jaitley had said that the government would cut “non-necessary” imports and ease overseas dollar borrowing restrictions for manufacturers, among other measures.
Gold and electronics imports, in particular, are expected to take the primary blow. According to RBI data, the CAD stood at $15.8 billion (2.4 per cent of GDP) in the April-June quarter of 2018-19 compared to $15.0 billion (2.5 per cent of GDP) in the same period last year.

While the government is contemplating measures to ease the pressure on the rupee, among them a separate dollar window for oil-marketing companies, it will keep a watch on external factors — higher US interest rates, further increase in crude prices, trade talks between US and China, the US mid-term elections in November and politics at home as India heads into state elections and the 2019 general elections. “If any of these factors take a turn for the worse, a further fall in the rupee cannot be ruled out by the end of this year,” says Goenka of India Global.
A further slide in the rupee has inflationary implications. “If the rupee remains under pressure, the RBI could be forced to hike rates citing risks to inflationary expectations and second-order impact of a weak currency,” says Rao of DBS Bank.

If the RBI increases interest rates, the cost of money in the banking system will rise, money supply will come down and demand in the economy is likely to be hit. This will affect growth, especially at a time when the GDP growth had picked up to 8.2 per cent in the June quarter, the highest in two years.

In his memoir Advice and Dissent: My Life in Public Service, former RBI Governor Y V Reddy narrates an incident. When asked, “How can the (RBI) Governor intervene in the forex markets to influence the market-related exchange rate without knowing what is the real value?” His response was, “I cannot define God. I can recognise the Devil. We can see excess volatility or an out of alignment exchange rate when we see it happening .”
What matters now is whether the government and the RBI have recognised the “Devil”.

Turbulence in the past


The Indira Gandhi government devalued the rupee from 4.76 to 7.50 against the
dollar, a depreciation of 57.5 per cent, under pressure from multilateral agencies as the dollar-rupee rate remained constant amid a rise in foreign aid, drought and wars with Pakistan and China


The rupee was devalued by 18.5 per cent to 25.95 in a two-stage devaluation by the Narasimha Rao govt to tackle the foreign exchange crisis, inflation and possibility of a default on external payment


The rupee depreciated continuously during the crisis period and reached a low of 42.76 per US dollar in August 1998, a depreciation of 16 per cent in the wake of the Asian financial crisis and downgrading of India’s rating after the Pokhran explosion. The Reserve Bank stepped in and sold dollars, hiked cash reserve ratio (CRR), repo rate and bank rate, and reduced access for banks to export and general refinance facility


The rupee depreciated sharply by 21.5 per cent from 39.99 in end-March 2008 to 50.95 at end-March 2009 when the global markets were hit by the US mortgage crisis triggered by the fall of Lehman Brothers. The RBI announced a rupee-dollar swap facility and liberalised foreign borrowings to stabilize the rupee


The currency depreciated by about 17 per cent during August to mid-December of 2011, reflecting global uncertainties, especially the deepening Eurozone crisis. The RBI responded by deregulating interest rates on rupee-denominated NRI deposits and hiking the ceiling on FII investment limit on govt securities and corporate debt


The rupee depreciated sharply by around 19.4 per cent against the US dollar between May 22, 2013, when it stood at 55.4 and August 28, 2013, when it touched a historic low of 68.85 on the back of reversal in capital inflows, high CAD, deceleration in gross domestic product growth rate, high WPI inflation and large fiscal deficit


From an intra-day high of 63.44 on January 2 this year, the rupee fell 15 per cent to 72.98 against the dollar last week, a fall attributed to crude oil price rise, United States-China trade war, rate hike fears and weakness in emerging market currencies

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