War of the currencies: Dollar Vs Rupee

The rupee has plummeted precipitously against the dollar and this recent dip has brought to the fore one crucial question –Tough times ahead for Indian economy?

Explaining in simple terms, the rupee is losing its sheen and has already lost “purchasing power” or how much it can buy (in the international market). The “value” of our currency is not enough to buy more goods or more dollars itself. In the last two years, the rupee has plunged 30 per cent. This means that we have to shell out 30 per cent more to purchase things that can be had for a dollar!

This tumbling of rupee is on account of factors like foreign investment outflows from Indian markets-debt as well as equity. The recent bout of weakness is fuelled by the prospect of unwinding of the bond purchase programme by the US Federal Reserve and structural factors like India's high current account deficit which makes rupee very vulnerable to external shocks. Typically, the currency of a country with high current account deficit tends to depreciate in such situations, which has been the case with the rupee too. As the Indian rupee slumps to new lows, the country's middle class has been forced to cut back on cars, electronics, smart phones, foreign education, groceries, imports, TV, fridge, ACs, foreign holidays and fuel.

Will this gloomy situation help anybody? Yes. Indian exporters who earn in foreign currency are set to benefit with rupee fall. Also, tourists who plan to visit India will find the exchange rate attractive. NRI’s, who remit money home regularly, are also using the opportunity to convert their foreign currency savings into rupee. But the extension of this situation can only prove to be very dangerous for the economy as the falling rupee adds to India's import bill that is already high due to large oil and gold demand in the country.

Although the RBI on its part will closely follow the foreign exchange market and supply dollars if needed to curb volatility in rupee-dollar exchange rate, the situation is not expected to ease instantaneously but will allow to soothe market tension around 57-58 rate in coming months.

Finance Minister P Chidambaram says that there is no need for panic over the weakness in the rupee and has assured that the government and the RBI were monitoring the situation closely.  I personally think this storm would pass too with gains to some exporters in offshore markets, textile, leather and other export-oriented sectors are particularly likely to gain and other similar industries.

Of course, there are analytics that set a gloomy image for the future such as claims that the Dollar might even hit 65! At this rate, we have to make informed decisions about our investments. As I discuss with some young minds, they come up with the best solution to all the issues:

·         Read & learn about the economies

·         Make educated decisions for your investments

·         Take time & think before you make a move on buying/selling