TLI Explains: Rupee Hits A New Low, Govt Refuses To See Red Flags, Says 'External Factors' Responsible
Thursday markets opened with another fresh low in the value of Indian Rupee at 70.24 in comparison to US Dollar before cutting some losses to trade at 70.16 at 11:40 am. The Indian rupee crossed ‘70 mark’ for the first time in the history of independent India on Tuesday.
The fall was triggered by financial crises in Turkey which lead to a strong demand for US dollar. The sharply falling value of Turkish Lira impacted many emerging economies and Indian currency was worst affected. The strong demand for American dollars was much more than the supply of Indian rupees which lead to this historic downfall in the value of Indian currency.
Experts fear that the current situation is likely to continue for some days to come as Turkish Lira crises will escalate even more impacting hugely the dollar-rupee exchange rates. Apart from Turkish Lira meltdown, the widening trade deficits along with the current account deficit (CAD) are putting a strong strain on the Indian rupee.
This falling of Indian rupee is not out of the blue
However, the fall in the value of rupee is not sudden. It slipped steadily this year around 9% from 63.67 per dollar to 70.25 per dollar today thanks to the surge in global crude oil prices. In fact, India’s trade deficit touched an all-time high of $18.02 billion this July as a result of high oil import bill. Reportedly, the sharp downturn in rupee was a result of foreign investors selling over $6.8 million in the equity market and $5.15 billion in the debt market. To add to the woes, the financial crises in Turkey led to a fresh trigger for selling across the developing markets. Because of all these, the Indian rupee reacted sharply.
It is to be noted that apart from the possible domino effect of dwindling Turkish lira the US Dollar is naturally strengthening as its economy is recovering. In fact, the dollar index has strengthened beyond 96 levels as it is considered a safe haven during financial crises.
India worst hit out of all developing markets
India is worst hit out of all Asian markets mostly because of its wide current account deficit, which pertains to the difference between its imports and exports. The Indian Government has blamed ‘external factors’ for such a sharp fall saying there is ‘nothing to worry’. However, the fact is that the rising value of the dollar has huge implications on the microeconomics of everyday India. In simple terms, it means that imports will become expensive. Imports by India include high purchases of petroleum, crude, and products, gold, machinery, electrical and non-electrical products, pearls, precious and semi-precious stones. According to the statistics from April to July in 2018, the Indian imports rose 17.05 percent to USD 171.20 billion from USD 146.26 billion in the same period of the previous fiscal year.
In layman language because of deteriorating rupee, petrol prices will shoot even higher leading to an increase in daily transportation costs. It will, in turn, increase the cost of goods and vegetables impacting every kitchen of India. On the other hand, a falling rupee is a good news for exporters in theory but the infrastructural challenges and bureaucratic hurdles make it difficult for them to cash in.
Economy v/s Politics
The historical low in the value of INR has led to a new political blame game between Congress and BJP. Congress is blaming BJP of inaction while BJP is attributing the low value of the currency to ‘external factors’.
Congress sharply attacked BJP tweeting “Modiji finally managed to do something that we couldn’t do in 70 years” along with a snapshot of current rates of conversion. In another tweet, Rahul Gandhi brought the irony to the fore with a video of Narendra Modi in 2014, saying, “Indian rupee gave the supreme leader a vote of no confidence, crashing to a historic low.”
On the other hand, the government is refusing to see the red flags. Attributing the tanking rupee to external global financial crises the finance ministry is refusing to acknowledge the issue. India’s finance minister Arun Jaitley in a tweet said, “Recent developments relating to Turkey have generated global risk aversion towards emerging market currencies and the strengthening of the dollar. However, India’s Macro fundamentals remain resilient and strong.” Jaitley added, “India’s foreign exchange reserves are comfortable by global standards and sufficient to mitigate any undue volatility in the foreign exchange market.”
India’s foreign exchange reserves are comfortable by global standards and sufficient to mitigate any undue volatility in the foreign exchange market.
— Arun Jaitley (@arunjaitley) August 15, 2018
However, according to the latest data by RBI, India’s foreign exchange reserves fell to a 7-month low of $402.7 billion last week.