- Posted August 21, 2013 by
7 reasons why Rupee is currently world’s fourth weakest currency
The rapidly falling Indian Rupee is a matter of concern not only for Indians, but also for investors. Till now, the foreign investors who invested in India till 2003 have lost 33% of their equity. How far will it go? In fact, it looks as if India is going to catch with Pakistan and both these south Asians currencies shall soon be in situation when one rupee equals one cent. Pakistani rupee is already nearing that status and Indian rupee is fast approaching that level.
Despite measures by RBI, the Rupee still remains volatile, as it is sitting at 64.44 in comparison to Tuesday’s 64.05 against the US Dollar. But one cannot rule out that the rupee remains in bad health with no sign of recuperating any time soon and high fiscal deficit has further added woes to the economy. Experts feel that the prime fault for these economic conditions rest at the doorsteps of the Congress-led UPA Government since acute policy paralysis for long periods of time, high levels of corruption and bad plans of social benefit programs have been the main cause for these conditions.
Onion prices have turned hot potatoes with prices touching Rs 80 per kg in most of the cities. The vegetable prices touched 11.91 per cent in July due to incessant rains and floods, which affected crops in some States. The Rupee on the other hand, has dropped by over 12 per cent since May. Currently, it is struggling at all-time low at Rs 64 and market mayhem continues as some of the stock prices are cheaper than onion. The fiscal deficit is no good news for the economy. Current Account Deficit (CAD) is near red line as it touched a record high of 4.8 per cent of GDP in the current fiscal year.
According to the recent Morgan Stanley report, the economy is on the verge of plunging to pre-liberalisation era of growth rate and GDP may slump to 3.4 to 4 per cent as the weak trend continues. The report further adds that this trend will make the economy more vulnerable and if the trend continues the rupee may slip further to 65 against US Dollar. Meanwhile, rating agency Moody’s said that depreciating value of the domestic currency is likely to inflate the fuel subsidy bill and will further put pressure on the fiscal deficit. In addition, Deutsche Bank cites that the Rupee may touch 70 mark against the US Dollar in a month’s time.
According to some rating agency reports, the Indian Rupee is currently the fourth weakest currency in the world which is a matter of concern for the Government.
Here are some of the factors which led to weakening of rupee:
1 Foreign Direct Investment: After several debates and delay, the Government finally allowed investment in the retail sector and several other sectors, including civil aviation, telecom, defence, but at the same time, delay in bringing such reforms witnessed withdrawal of major projects by global giants like ArcelorMittal and Posco. Due to long delay in land acquisition, corruption and adverse market conditions, steel major POSCO scrapped the proposed 6 million tonnes of steel plant in Karnataka. It was followed by ArcelorMittal that also scrapped its $12 billion (Rs 50,000 crore) steel plant project which it was planning to set up in Odisha.
2 Withdrawal of US stimulus: Earlier in June, when the US Federal Reserve chairman Ben Bernanke announced that US will withdraw stimulus from foreign countries, dollar demand surged as foreign investors withdrew their investment from the Indian market in search of profitable return in developed economies. As a result, economic crisis continued with Rupee slumping to all-time low and no country willing to invest in India.
3 Foreign Institutional Investment (FII): Foreign investors have pulled out nearly Rs 18,500 crore (about $3 billion) from the Indian market as Rupee continues to tumble and the economy is unlikely to see any recovery in the second half of the downturn with withdrawal of investment from abroad.
4 Recovery of Europe and Japan: The Eurozone debt crisis is also expected to move onto a positive territory as a result, the investment will be attracted to European nations. On the other hand, Japan recovered well with the highest level of exports since July 2010.
5 Current Account Deficit(CAD): The fiscal deficit is no good news for the economy. Current Account Deficit (CAD) is near red line as it touched a record high of 4.8 per cent of GDP in the current fiscal year.
6 Strengthening of dollar overseas: The US economy recovered with speculations that Federal Reserve will withdraw its stimulus package which strengthened the Dollar against Rupee.
7 Low GDP: Overall, the Indian economy remains in bad health with low GDP and slowdown in manufacturing, mining and agricultural sectors. Within a week, Index of Industrial Production(IIP) contracted to 2.2 per cent, demanding a cut in interest rates to revive demand and to fast-track implementation of large projects to boost economic growth. Seeing the pathetic state of economy, experts also feel that the factor like low GDP, high inflation, weak rupee and low IIP is a signal of recession and if this recession is not rectified the economy can enter into a state of stagflation where growth of economy stagnates and inflation is extremely high.
Dr. Bikram Lamba, a political & business strategist,can be contacted at email@example.com