Weak rupee worries India: Inflation likely to rise and investment to fall

- Citibank's prediction that the rupee will be 40 against the dollar in 2014 has been completely wrong: Against the hegemony of the dollar, the forex reserves of the country are also witnessing a rapid decline.

Before the 2014 Lok Sabha elections, there were a lot of reports across the country that the performance of the country's government was weakening in the second term of Manmohan Singh. Scams, lack of decision-making power in the government, the start of withdrawing the stimulus announced by the US in 2008, declining foreign investment in India... the Indian rupee continued to tumble amid such reports. At that time, the rupee had reached the level of 76 against the dollar. Then the situation improved due to aggressive measures by the Reserve Bank, a stable government at the Center in May 2014 and other reasons.

At this time, Citibank, one of the top banks in the world, predicted that the rupee would rise against the dollar after the new government came in, increasing by 35 percent and reaching around 40. The bank's head of Asia Pacific currency markets, Adam Gilmour, made such a prediction. However, this prediction did not come true. Not only that, but the rupee has not even come close to 40 against the dollar. (The table gives the average prices against the dollar for the three months from July to September of each year).

The reasons for the weakening of India's currency in 2013 and the rupee at its historical lows today are different. Second, it is now being argued that even if the rupee depreciates, the economy will benefit from it. However, this argument is childish and today we have to discuss this childish argument.

If the rupee weakens against the dollar, India's imports become more expensive. Imports are therefore a matter of greater concern as India consumes more by importing than domestically producing and exporting. This import export deficit is a matter of concern for India. That is, the more expensive the import, the more the rupee goes out of the country, the bigger the deficit and the more the rupee continues to weaken or there is pressure on it to weaken. Meanwhile, the rupee touched an all-time low of 81.32 to close at 80.99 against the dollar on Friday.

Depreciation of the rupee hurts the country

For example, the average price of crude oil imported by India in June was $116.01 per barrel and in September it fell to $92.31. This decrease in dollar is 20.4 percent. In the month of June, the rupee was at an average level of 78.19 dollars against the dollar, so at that time the price of imported crude oil in India was Rs. 9071 per barrel. On Friday, the rupee was 80.99 against the dollar, so the September crude import price was Rs.7476 per barrel. Crude prices in rupees have decreased by 17.5 percent only. The country does not get the full benefit of the decline in the international market!

According to government statistics, the deficit between India's imports and exports was $11.42 billion last year (April to August 2021), which has increased to $79.10 billion in the same period in 2022. That means the deficit has increased almost six times. Last year, the rupee was 74.09 against the dollar, which means that India had to raise Rs.84,690 crore for the deficit. This time the deficit has also increased and the rupee has also weakened, so an additional Rs.6,40,630 crore has to be raised. If the rupee had been at the level of last year, India would have needed only Rs.5,86,051 crore. The country has suffered a loss of Rs.54,579 crores in these five months only due to the weakening of the rupee!

Helpless Reserve Bank

As the rupee continues to weaken against the dollar, there is a concern for the Reserve Bank of India. The Reserve Bank is trying to stabilize the spot market and the forward market by intervening continuously. Officially, however, the Reserve Bank has always maintained that it has no benchmark for a particular value of the rupee in the forex market. Such a governor will speak again after the policy on September 30, but right!

But the fact is different. As on September 23, the country's forex reserves stood at $545.65 billion, a two-year low. In the last nine months, it has seen a decrease of 100 billion dollars. These three factors are responsible for the continued selling of foreign entities in the stock market, expensive imports and efforts to prevent the rupee from depreciating by selling dollars from reserves in the forex market.

There is another concern for the Reserve Bank. The Federal Reserve in the United States continues to raise interest rates. US currency and US government bonds are considered the safest investments in the world. If 3.45 - 4.00 percent interest is earned on government bonds in America, who would invest in Indian rupees for 7.25 percent? Investing in dollars avoids the risk of the impact of forex price fluctuations while investing in India has the impact and diminishing returns. This difference between the interest rates of India and America is the lowest in the last 15 years and it is possible that it will decrease even more!

Imported inflation risk

Apart from crude oil and gold, India's major imports include chemicals, pharmaceutical chemicals, machinery, edible oil, pulses. As mentioned earlier, all these things are necessary and India has to spend more for the increasing value of the dollar. If paddy becomes more expensive, India's imports become more expensive and there is also a risk of inflation in India.

In this situation, instead of the short-sighted calculation that higher domestic prices will benefit India only when exporting, the rupee should stop weakening against the dollar, stabilize and the idea that the rupee should be allowed to depreciate should be dropped.

Rupee against dollar

year	value of rupees
2012	55.20
2013	62.06
2014	60.57
2016	64.91
2017	64.30
2018	70.07
2019	70.33
2020	74.38
2021	74.09
2022	80.99