A festering wound

The falling rupee briefly touched the USD 80-mark on Thursday, triggering a wave of apprehension in economic and social quarters. Ever since the onset of the Russia-Ukraine war in February, the stumbling Indian Rupee has been on a perpetual decline and is showing no signs of recovery. Official spokespersons still appear complacent — attributing the Rupee depreciation to ‘external’ factors resulting in the strengthening of the US dollar instead. It is also being argued that the current depreciation is a short-term phenomenon resulting from a hike in international crude oil prices and restrictions on wheat exports. But the steady decline in the value of the Indian Rupee against the US dollar over the past decade shows that not just the rupee depreciation is a persistent problem but has also been getting exacerbated periodically. In May 2014, the value of the rupee stood at around USD 58.5. Declining steadily ever since the curve got starkly steeper in 2018 and 2020. Mid-October 2018, the value of the Indian Rupee fell to around USD 75 and towards the end of April 2020, the value nearly dropped to USD 77. Against such a background, it may be wrong to assume that Rupee depreciation is a oneoff problem. Experts point out that domestically manageable factors — including widening current account deficit (CAD), slipping forex reserves and withdrawal of foreign portfolio investments (FPIs) by international players — have led to the Rupee conundrum. Arguably, the current account deficit has been a perennial problem for the Indian economy. India’s CAD is estimated to touch USD 105 billion this fiscal — accounting for almost three per cent of the GDP. India is a net-importer country. While it enjoys marginal trade surpluses with countries like Nepal, Sri Lanka, Bangladesh, Turkey, Netherlands and Iran apart from the United States, it has a glaring trade deficit with China — standing at around USD 73 billion during 2021-2022. India also has a significant trade deficit with Russia and most of the Middle East countries. In the current context, India’s trade deficit for the April-June quarter almost doubled to that during the corresponding period in 2021 — increasing from USD 31 billion to USD 70 billion. If India doesn’t find a solution to its perennial CAD problem, the depreciation of the rupee will remain a festering wound. Depletion of forex reserves and withdrawal of FPIs are somewhat related problems. A simple retrospection of the reasons behind investors’ pulling away would reveal two possible contributing factors — one, that the investors are losing confidence in the Indian market and, two, amid the US Fed and other Central banks raising policy rates, investors may be finding the current scenario suitable for booking profits they have made over the past few years. Notably, though the pace of foreign portfolio outflow has been steep over a couple of months, the trend has been continuing for well around a year. The government may initiate measures aimed at boosting investors’ confidence. It also needs to take stringent action against religious provocations and conflicts within the country that are known to dampen investors’ interest in an economy. The Reserve Bank of India, on its part, has broadly taken two significant steps to improve the situation. First, it has started selling US dollars in open markets out of its forex reserves. Second, it has decided to go for a rupee settlement mechanism. Both steps have their own sets of limitations. While selling the dollars in the open market will stabilize the value of the rupee by increasing the dollar supply, it may take a significant toll on the country’s forex reserves — snatching the last of the attributes the government has been boasting of. At the same time, the rupee settlement mechanism will allow countries to trade with India in Rupee terms. It, however, remains dubious why countries — particularly those having trade surpluses with India — will choose Rupee over dollar. The problem of Rupee depreciation has deeper roots than what is being conceived, and graver is its fallouts. Considering that a falling rupee will further exacerbate inflation, making life tough for the common masses, the government needs to take the issue seriously.