Saturday 10 December 2022
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EconomyRupee: From 4 per pound-sterling to 80 a dollar in 75 years

Rupee: From 4 per pound-sterling to 80 a dollar in 75 years

One of the many reasons for rising prices in an import-dependent India is the cheapness of its currency, the Indian rupee. Celebrating its 75th year of independence, economists will need to work hard to reverse the trend of slipping against the US dollar, which happened steeply during the Indira Gandhi years, which was a compulsion to get real during the Narasimha Rao years and which got subjected to the vagaries of the global economy post-2007. If we are to realise Prime Minister Narendra Modi's "Amrit Kaal" dream that is. 

Studying how the Indian currency rupee has fared against other global benchmark peers for the past 75 years, one observes a lot of macroeconomic changes since 1947, including the economic stress in the 1960s led by a decline in food and industrial production. Then came the Indo-Chinese and Indo-Pakistani wars, which widened spending while economically unviable socialism, which never succeeds anywhere in the world, eventually led to the balance of payments crisis.

Rupee fell sharply first under Indira Gandhi

With high import bills, India nearly defaulted as the foreign exchange reserves had almost dried up. The then-Indira Gandhi government had to go for a steep devaluation of the rupee. The value of the rupee depreciated from Rs 4.76 against the US dollar to Rs 7.5.

Then in 1991, India again found itself in a serious economic crisis as the country was not in a position to pay for its imports and service its external debt obligations.

Again, India would nearly default, necessitating much-needed reforms to open the country's economy. To negate the crisis, the Reserve Bank of India devalued the rupee in two drastic moves, once by 9% and then by 11%. After this devaluation, the value of the rupee against the US dollar was around 26.

From Rs 4 for the then-benchmark pound-sterling on 15 August 1947 to about Rs 79 or Rs 80 against the US dollar, the rupee became cheaper by more than 20 times in the past 75 years, as the British currency has always been more expensive than the US dollar. While the dollar was not the benchmark in 1947, it was cheaper at Rs 3.30 at the time of independence.

Gaurang Somaiya, the forex and bullion analyst at Motilal Oswal Financial Services attributes the fall of the rupee to "many factors, with trade deficit now rising to record highs of $ 31 billion from almost no deficit at the start of independence mainly contributed by high oil import bill". "We expect that rupee could continue to fall against the US dollar going ahead, but the pace of depreciation could be getting slow following a massive war chest build by the RBI in the reform of foreign exchange reserves," he said.

Even though the falling rupee may not benefit the whole economy, a devalued currency has its merits as it aids in boosting exports.

Research Analyst Dilip Parmar of brokerage house HDFC Securities notes that the rupee has been depreciating at a compound annual growth rate (CAGR) of 3.74% against the US dollar since the economic reforms of 1991 because of inflation and rate differential between the US and India.

The rupee was steady between 2000 and 2007 due to the substantial foreign investments flowing into the country, but it declined thereafter during the global financial crisis of 2008. "Further looking at the past, we see major depreciation started from 2009 onwards, from 46.5 to now at 79.5, 4.3% CAGR as compared to almost unchanged from 2000 to 2009, from 46.7 to 46.5," Parmar said.

The reserve currency of almost all countries, the US dollar is detrimental to other currencies, especially in times of sharp volatility in financial markets, as it weakens peer currencies.

As the cost of imports becomes higher, domestic inflation may be triggered, which in turn may reduce purchasing power in the economy.

Rising costs of imports may also increase the current account deficit. For April-July 2022, India's trade deficit stood at $ 100.01 billion.

A widening trade deficit also contributes to the weakening of the rupee. The Indian rupee in July fell below the psychologically important level of 80 against the US dollar for the first time as high crude oil prices amid tighter global supplies boosted demands for the US dollar.

Because exporters won't let rupee appreciate

A very big factor in the rupee not appreciating substantially even when the Indian economy is doing very well is the exporters' lobby. While India imports far more than exports goods, the importers' lobby is as good as non-existent. The exporters, on the other hand, put successive governments under tremendous pressure to not let the rupee gather value because then their buyers will hesitate to buy Indian goods for which they must pay more dollars (or more units of their own currency in case a bilateral agreement stays away from the dollar in trade between India and another country).

However, a currency that is cheap in perpetuity does not help the economy much, as foreign buyers get habituated with the low cost of buying from India and tend to take its cheapness for granted, showing no urgency to buy.

There is, however, a silver lining.

The brighter side

SBI Research said in its latest report said an interesting development is taking place in the global currency market as there has been a significant jump in trade in oil and other commodities in currencies such as the Renminbi, Hong Kong Dollar, and Arab Emirates Dirham at discounted rates.

"Dollar distancing is finally happening, and it is time for India to pitch the rupee as a credible, secular alternative in the changing world order?" SBI Research questioned in its report.

Coming to the share of the US dollar in global foreign exchange reserves, it has been shrinking since the start of the twenty-first century, falling close to 59% as of the end of December 2021, from above 70% two decades back.

The RBI also seems keen to reduce the dominance of the US dollar as it announced a mechanism to settle payments for international trade in rupees earlier this year, especially for India's exports. That mechanism may help in internationalising the rupee in the long run.

Still better than many other currencies

In July, Chief Economic Advisor V Anantha Nageswaran said that the rupee had declined only against the dollar and has strengthened against all the other major currencies of the world. He explained that, unlike previous crises, the depreciation of the rupee against the US dollar was lower than other major global currencies such as the Swiss Franc, the Euro, the British pound and the Japanese yen. He said that with crude oil prices coming down and the onset of monsoon, inflation is expected to moderate.

"Even though it has depreciated by 7 per cent against the dollar, I would rather urge you to look at it as a dollar appreciation and not rupee depreciation. Because rupee is not the only currency that has depreciated," Nageswaran said, "This time the rupee has declined only against the dollar but has strengthened against other major currencies."

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