“Two friends raced along a race track. Surprisingly enough, one of them completed 70 laps when the other had just completed one!”
If that sounded like a far-fetched athletics problem to you, then it might be surprising enough for you to learn that it is how our Indian Rupee is competing with the US Dollar; unfortunately ours is the latter of the two racers.
Well, this article can easily be stretched with the gilded description of the golden era of India before the British Raj. It should be understood that such an imagery is no myth. India was the trade centre for most of the parts of Asia and Europe, which was what attracted Britishers to India in the first place.
To put it differently, India was the faster friend in the race.
However, many factors have pummeled the economy of India from time-to-time while the US economy has skyrocketed. Trade had been globalized since a very long time and hence, often the developments in one nation ended up affecting the trade and exchange of another nation, completely physically secluded from it.
One of the major internal factors for the decline in one currency value against another are the high inflation rates of that nation. The monetary needs of a nation, especially for a developing nation are quite high, and the governments at times resort to printing more and more currency in order to meet the high financial demand. However, providing only short term benefits, this leads to the presence of a large amount of money available in the economy and hence the prices shoot up. As a result, even for odd items, one needs to present a large amount of currency. The most remarkable historical example of such a situation was witnessed in Germany during the Great Depression when people used to carry suitcases of currency for the purchase of daily groceries like bread.
In today’s age, a similar crisis is being witnessed in Zimbabwe where the government has started to print currency in millions as it is no longer feasible and practical for the currency to be produced in smaller denominations.
Politics and government policies on terms of trade also play a pivotal role in this scenario. A country less prone to political instabilities attracts foreign investors who bring with them the foreign capital. Also, government’s relaxation on trade and the ease with which foreign investors can invest in the country’s resources are crucial. Essentially, the country’s debt borne by the Central Government also plays a role in the exchange rates. Foreign investors are able to predict a rise in government debt within a particular country. As a result, a decrease in the value of this country’s exchange rate will follow. The role of foreign investors is also seen in future expectations of the political and economic situations. We often see strengthening of the stock market and the exchange rates of currency when a strong government is elected with an overwhelming majority. This is partly due to the fact that a stable government is seen as a sign for stable political and economical situation in the country.
In context of India, the reason is simply the high demand for dollars against the fall in the demand for the rupee. It is a vicious cycle in play. Due to lesser value of the Indian Rupee, people tend to acquire dollars to meet demands.
Take the example of the love that Indians for gold. To meet high requirements of gold, people tend to resort to dollars instead of rupees.
This essentially means India will spend substantially more dollars buying stuff from other countries than it earns from selling goods and services across borders, leading to a weaker rupee. Other factors that can be considered are higher crude oil prices, widening trade deficit, and higher capital outflows, according to Prathamesh Mallya, an analyst at Angel Commodities Broking.
With the latest record low of Rupee at 70.32 against the US Dollar in the first fortnight of August 2018, the concern is quite expected and the issues are questionable. Subhash Chandra Garg, External Affairs Secretary issued a statement saying this steady dip in the currency is nothing to be concerned about as it is in line with the depreciation of the other currencies and is due to external factors. While, the SBI Chairman is saying it has not depreciated as bad as other currencies. With a fall of 6.7% since April 1 this year, the market is expected to attain stable equilibrium soon as the conditions dictate.
So, according to the government, the economy is somewhat anchored, yet is afloat and hopefully will resurface. In words of the market experts and economic analysts, the IT and Pharma Industries are expected to gain positively from this new low of the Indian Rupee in 70 years, as there are exporting industries. Crude Oil suppliers in India such as ONGC is also expected to be benefitted as they will trade in dollar terms.
In conclusion, while the current exchange rate is perched unhinged on the brim of another dip, we can only expect our currency to provide a healthy race to the US Dollar in the near future, while we gauge onto various factors: both positive and negative that will shape the Indian Economy vastly on the fiscal lines, at least till our Rupee recovers.