The vulnerable Indian Rupee has witnessed sharpest fall in recent times when it hit past the psychological barrier of Rs.60.00 against the US Dollar. The 10% slump in the Quarter 1 of the financial year (11% since May & 5% in June) has been the lowest quarterly falls in the past nine years.
The faculties attribute the Foreign Institutional Investors, huge Govt. borrowings, current account deficits, rising dollar and lack of policies as key reasons for the depreciation of the Rupee.
Holding the Foreign Institutional Investors largely responsible, Dr. Jitendra K Das, said, "When the Indian economy is driven by Foreign Institutional Investors (FII), the Rupee becomes a slave of FII, hence, it will slide helping the FII masters. This is also indicated by the falling industrial productions". The strong gains in the US dollar and the Euro levels, are also contributing to the huge losses in the rupee.
Indian rupee has fallen even against a weak euro and it has emerged as the worst performing currency in Asia. This is a complete reversal of the situation that prevailed just a couple of years ago when the global economic uncertainty in the aftermath of the US subprime crisis had actually benefitted India, which not only emerged unscathed from the crisis but also posted robust growth making it one of the best performing economies of the world. Huge Government borrowings, lack of solid policies and growing demands of gold also contributed to the weakening of the Rupee.
When asked whether RBI should intervene, Dr. Das said, "Yes of course RBI should intervene. If it is not being done then it indicates that they want to support foreign investors in the short run. These foreign investors could be 'Indians' or people with close interest in India. A dollar flowing in gives you more money. Interested people may also want to know more about the ‘Promissory Notes' scheme of the GOI that allowed foreign funds to flow in easily."
Explaining the fall of the rupee, Dr. Keya Sengupta of IIM Shillong, said, "As the falling value of rupee is mainly due to external factors, it is more difficult to control the trend immediately. Therefore once confidence in the rupee starts declining it is much faster in comparison to the rise in confidence whichtakes a much longer time. The situation in the Indian economy has been further aggravated in comparison to most other Asian nations because our current account deficit had already been a matter of great concern. Therefore in terms of the domestic currency the quantum of deficit is rising rapidly due to the falling value of rupee."
She further explained that though initially exporters seem to benefit as they receive more in terms of rupee for every dollar of export, but the benefit is short lived. Rising cost of imported items due to falling value of rupee will raise cost of manufacturing of exported items. Therefore exporters will loose their competitiveness in the global market in the long run, which will wipe out their present advantage. On the other hand rising current account deficit will raise inflation, which will further raise the production cost, which will lower the advantages of the exporters.
Sharing similar sentiments on the FIIs Dr. Keya Sengupta said, "Falling value of rupee has resulted in flight of capital from India (the FIIs), which is reducing the value of rupee even further. Some immediate measures should be taken to arrest the outflow of capital from the country. Otherwise taking steps to correct the current account deficit to arrest the falling value of money requires long term planning and solutions."
The depreciation will have some serious consequences and apart from costlier imports the weak currency will be a negative factor for India's growth and exposes the corporate sector with unhedged overseas loans. The RBI is also likely to delay rate cuts and keep liquidity tight as financial stability takes precedence, hurting domestic growth even further.