Let’s welcome the rupee’s decline

There is much unnecessary hue and cry over the decline of the rupee. Might the rupee not be the target of currency speculators whom Malayasi...

There is much unnecessary hue and cry over the decline of the rupee. Might the rupee not be the target of currency speculators whom Malayasian Prime Minister Mohammed Mahathir does not tire of blaming these days? The presumption is that a weak rupee somehow benefits foreigners, speculators or otherwise. Yes, it does but not all of them gain. Foreign investors, in particular, stand to lose. Thus the decline of the rupee may well turn out to be a boon for India by keeping foreign investors at bay and by forcing us to turn our attention on the better utilisation of our own capital.

The fact is that at 39 to a dollar, the rupee is still stronger than 25 rupees in 1993. This is because it is incorrect to assess the rupee against the dollar alone for the latter is itself moving in relation to other world currencies. In order to overcome this difficulty the RBI calculates Real Effective Exchange Rate’ (REER) of the rupee by assessing its value against 36 currencies. The REER stood at 57.1 in 1992-93. In April this year it had gone up to 65.4. There has been an appreciation of the rupee since then. Thus the rupee should be allowed to depreciate by 12.7 per cent merely to regain its earlier rate. This means that an exchange rate of 40 is fine.

For those who believe that large doses of foreign investment are harmful there is a strange desire to see a strong rupee as well. They don’t realise that the two are contradictory. When foreign investment comes, it brings in dollars. The supply of dollars increases and its price declines. There is a corresponding rise in the value of the rupee. This is what had been happening all these days when the rupee had been appreciating.

The reverse is happening now. For the first time last month there has been a net outflow of foreign portfolio investments since capital markets were opened up in 1993. This withdrawal is leading to an increase in the demand for dollars. Foreign investors have to sell their securities in rupees on the BSE and then buy dollars with it for repatriation. This increase in demand of the dollar pushes up its price and consequently pushes down the rupee. Thus, one cannot have a strong rupee and weak foreign investment.

In fact, the rupee’s decline could be a blessing in disguise. It may result in foreign investors staying away for some time to come. And India may be saved the ignominy of having to go with a bagging bowl to the IMF.

The flip side is that the national debt increases as the rupee depreciates. But then, alas, all good things come to an end. Having enjoyed the benefits of a strong rupee courtesy foreign investors for all these days we must realise that the party is over. It is time to make our own money productive.

Unfortunately, it is here that we are failing. So hooked have we become to foreign money — whether through FI, debt or IMF bailouts — that we do not bother to remove the bottlenecks in internal investments. Law and order is collapsing; courts do not dispose of the vast backlog of cases; the government officers continue to bleed the nation; the licence permit raj still reins supreme for small industries; infrastructure is falling apart — the list could go on. We have ignored these problems because we were lulled by, among other factors, the rising rupee. Thank God, the delusion is over.

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Another factor responsible for the decline of the rupee is the decline in the world prices of gold. After touching $ 400 an ounce it is down to $ 296. Now, Indians and Chinese, two ancient civilisations still chugging along, have seen paper money and estate values vanish many times over. What is the land value of the great towns of Harappa and Kalibangan today? Or of Nalanda and Hampi? So Indians would not lose this golden opportunity of buying out the world’s gold. For them, investment in atta chakkis can wait. Although, it may seem that putting money in gold is entirely foolish when India is starved of capital, this may not be the case. With an economic shake-out on the horizon, won’t gold be a safer investment option?

The decline in the value of the rupee is partly due to panic on the part of foreign investors which is a blessing; and partly due to the import of gold which too might prove to be a blessing. So let us live with it. The real action is required not at the level of forex intervention by the RBI, but on law and order and lean government which alone can divert Indian money to productive purposes.