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
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