Why is the Rupee depreciating Against Dollar?
Created on 18 Sep 2019
Wraps up in 4 Min
Read by 3.5k people
Updated on 22 Oct 2020
This season of monsoon has seen much more than rains falling from the heavens. The GDP figures, manufacturing output, tax collection are only a handful of indicators.
Finance Minister is busy answering in press conferences and inadvertently blaming the millennials. However, the investors see no relief in sight and just hoping for the worst to pass. This is the story about the fall of the Indian Rupee.
The falling price of any commodity, be it stocks, metal or currency, is the direct result of its demand. The Rupee has faced similar blows against the dollar.
The dollar was around ₹65 this April. However, it soared up to ₹72 in September 2019. Why did this happen?
Because of a surge in crude oil prices. India now was paying more for importing oil.
A considerable amount of dollars was flowing out of the country to refill our petrol pumps (the bill increased from $18bn to $28bn for the first quarter of FY 2019). The import bill kept on rising, and it will not stop because OPEC has decided to cut the petroleum supply for (at least!) another quarter.
For a long period, the world was looking optimistically to the emerging markets. Low-interest rates in the US lured foreign investors into borrowing money from there at low prices and invest in growing markets like India for higher returns.
Then came the regime of Donald Trump. The trade wars escalated, and the ‘Make America Great Again’ (the US version of ‘Make in India’) boomed. The countries started pulling off their money and started investing in the now growing US domestic market.
It was the first time in the last six years, and the only second time in the previous ten years that FDI growth in the US ranked higher above India. This was the first instance of ‘capital flight.’ The capital invested in emerging markets was being taken back to the home country. They sold their assets in India in Rupee and used this Rupee to buy dollars. This increased demand for Dollars and reduced demand for Rupee.
Not just this, the increasing US domestic market now needed loans to expand. Due to the high demand for loans, interest rates started increasing. The incentive of borrowing cheap and investing in India began to diminish. The amounts of dollars coming in are much less to dollars going out.
One question still pertains. Is it all the US brought disaster? No, Indian policies have a fair share of the blame for partaking.
The slowdown India currently sees is because of the lack of demand. Policies like demonetization have crippled the demand while GST has hit the supply-side market. The policy changes in the government are so frequent that Finance Ministry has rolled back almost all the provisions it had in its budget. In Nobel Laureate Mohd Yunus’ words, “Such an environment is not conducive for foreign investments.” Portfolio investors, who invest in security markets, find it easy to pack their suitcases for now.
One simple question we all should know an answer to before we discuss any further. How does any currency get is US dollars?
The answer is trade. The dollar is a global currency. The more you sell things to people, the more dollars you get in exchange. More dollars you have with you to import from the world. Here come the Indian exports.
Indian exports had been growing quite healthily until 2016. India’s automobile, steel, jewelry, and IT were still peaking. However, it was not the right road ahead. Trump became the US President. Trade war began. Restrictions raised on steel products. Visa rule changes made it tough for companies like Infosys and TCS to collaborate with US clients as aggressively.
Shoddy implementation of GST led to the crash of exports in the jewelry market. They now export via the Hong Kong route. It is not just jewelry exports. Most sectors faced the blow: some less, some more. Moreover, falling Rupee could not boost up exports, as it is largely believed.
The falling exports have coupled with the falling Rupee.
It is essential to understand that for every paisa rupee falls, we have to pay more. The same commodity of $1 cost us for 72 then 67 a quarterback.
The government has started taking steps to help the exporters. RBI might intervene if the situation begins slipping of our hands. The trade war is not where we can do much, but we can still fix GST so that exporting industries face lesser problems. A certainty in policies rather than surprised like demonetization would help restore investors trust in the economy and get Rupee back to that cliff from where it fell.
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