The Slide Of Rupee

The rupee has plunged to an all-time low against the dollar and its fall has become a subject for debate.The usual discussions on the fall of the rupee bring up macro-economic matters such as slow economic
growth, huge current account deficit, rising imports etc.

At the time of independence when India had no foreign borrowings the rupee was at par with the dollar.With the introduction of the 5 years plan and the subsequent requirements for foreign investments the
dollar slowly rose. In 1985, after the Bofors scam, which toppled Rajiv Gandhi’s government, the dollar was equal to 12.35 rupees and since the economic liberalization in 1991, there was a sharp devaluation of rupee and the rupee had dropped to Rs.24.5 against a Dollar. The dawn of the third millennium further worsened the condition of rupee against dollar. Indian economists are trying hard to chalk out a strategy to counterbalance the falling value of rupee but it seems the attempts are futile.

The major reasons for the plunging fate of the rupee are:
Current Account Deficit (CAD)
CAD is considered to be the key factor behind the steep volatility of rupee against dollar. CAD occurs
when the total import of goods and services of a country is greater than the total export of goods and
services, thus making India a debtor to the rest of the world. In the second quarter of 2013 the CAD of
India was 21.8 billion USD. This has hit hard on the rupee.

Strengthening of Dollar
In the last six months the dollar has strengthened by 3.52 percent with the strengthening of the US
economy. The dollar has been rising on signs of growing economic momentum and talk of an early end
to the Fed’s stimulus effort. This is something which is beyond the control of the Indian Government and
it is hampering the recovery of the rupee.

Insufficient inflow of FDIs and outflow of the foreign investments
The downfall in the Indian economy has worsened the situation and the government is unable to
generate heavy capital inflows. Despite all the government effort to allow Foreign Direct Investment
(FDI), there hasn’t been significant FDI inflow. The US federation has withdrawn some of its bond buying
programmes, resulting in a sudden outflow of money that in return has left India far behind in the race.
Foreign investors has been pulling out of the Indian economy. The month of May has seen a record
outflow of foreign investments of Rs. 44162 crore. With the giants like Posco pulling out of its Rs. 30000
crore steel plant project in Karnataka followed by ArcelorMittal pulling out of its Rs. 50,000 crore project
in Odisha due to delays and land acquisition delays. This has shrunk the total inflow of capital in India.
Indian investors have been spending more abroad than foreign investors have been spending in India.
This has led to the further deficit of current account.

Rising Imports
The rising import bill is one of major concern and it has hindered the government’s effort to tackle the
falling rupee. Oil accounts for 35% of the total imports and gold 11% on India’s current bill. There has
been a heavy demand for the greenback from the exporters of oil, the most prolific buyers of dollar in
the world market, thus pushing rupee lower. In the gulf countries, the dealing of oil is done in dollars,
i.e, if India has to purchase oil, it has to pay in dollars, so for this India needs to purchase dollars from
USA in exchange of rupee. This has led to the further devaluation of the rupee.

Poor Economic Growth
The Gross Domestic Product (GDP) growth has hit its lowest patch in the last 10 years. With fall of the
GDP growth to 4.8%, it had significant effect on the stock markets and the falling rupee. The
manufacturing, mining and the agricultural sector has faltered and investors have become cautious of
investing in India.

The central government has unraveled a multipronged strategy to bring about an increment in the
inflow of dollars and limit the outflow to compensate for the sliding value of rupee. A planned increase
in import duty has been exercised to shore up the decrement in rupee.
Some of the other possible remedies that can be emphasized are:

• The customs duty on several red-hot imports like gold and silver is on the rise, it’s a strategic move by the central government to ease the gap between dollar and rupee.
• NRI bank deposits can be made more attractive and foreign loan norms eased.
• The government has also decided on three public sector institutions based on finances to raise funds in dollars through bonds.
• Electronic goods top the list when it comes to making big business. In order to stabilize rupee a significant increase in customs duty on Electronic goods needs to be exercised.

Economists believe that these measures will bridge the foreign exchange (Forex) gap significantly. Even
finance minister P. Chidambaram anticipates that the government will be able to prune annual imports
by $7 billion and thereby increasing inflows by $11 billion. This would in return help maintain the Current
Account Deficit (CAD) at $70 billion which roughly estimates to 3.7 % of the gross domestic product.
There have been a slew of measures that have been undertaken by the government. It clearly shows its
urgency to deflect a possible crisis on the economy of India.