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Indian Rupee: One Of The Worst Performing Currencies

The rupee is still overvalued, according to the 36-country Real Effective Exchange Rate calculation after adjusting for inflation

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Indian Rupee: One Of The Worst Performing Currencies. flickr
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The Indian rupee’s plunge to an all-time low of 69.09 against the US dollar, compared to the previous low of Rs 68.865 in November 2016 reflects the ill-effects of US President Donald Trump’s disastrous economic policies on the world at large. Indeed, American protectionism through higher import duties coupled with the consequences of renewed US sanctions against Iran is indeed playing havoc with economies across the world. That the rupee has fallen by more than eight per cent over the last one year is not good news for India, though, there is a silver lining in terms of the possibility of higher exports. The hard reality is that the rupee is one of the worst performing currencies in the world and the consequences of American policies could make things worse.

Not only have foreign institutional investors been pulling out funds from the Indian market, having withdrawn a whopping Rs 46,197 crore in three years, the spectre of higher crude prices due to the sanctions against Iran could disturb the applecart further considering that India depends heavily on crude imports to meet its oil needs. If there is any consolation at all for the rupee’s plunge, it is that most emerging market currencies are crashing.

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Indian currency notes. Pixabay

Also read: Crores of rupees being spent on defunct websites of Municipal Corporation of Delhi

The Reserve Bank’s prop by selling US$400 to 500 million in one-month futures contracts has saved the day for India. Almost an equal amount has been sold through Mint Street. Mercifully, a weak rupee need not be necessarily bad for the Indian economy. The rupee is still overvalued, according to the 36-country Real Effective Exchange Rate calculation after adjusting for inflation. As of May, the over-valuation was 14.67 per cent. This could give exports a boost which is a silver lining. There is also a Moody’s report which says that India is one of the five countries that are least vulnerable to currency pressures amid strengthening of the US dollar due to low dependence on external capital. But the downside is that as US interest rates go up, investors who borrowed at a cheaper rate would find returns from investing in India not worth the risk. On balance, major economic challenges lie ahead of India meeting with would be no mean task. (IANS)

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Fall Of The Currency And Increase In Oil Prices: India ‘s Turmoil

The falling rupee has given a boost to some of India’s most lucrative exports, such as software services and pharmaceuticals, which add up to billions of dollars.

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Rajesh Kumar, left, shares a ride to work with another employee, Dilip Swain, right, as higher petrol prices in India begin to be felt in people's pocketbooks.VOA

The fall of the currency of India to record lows and rising global oil prices have raised worries that the world’s fastest growing economy faces headwinds that could hurt the fortunes of Prime Minister Narendra Modi’s party in next year’s general elections.

From people filling fuel at gas stations to thousands of students heading out to study overseas, the impact of the slumping rupee is sparking discontent.

Having plunged by about 12 percent against the dollar this year, the rupee is one of Asia’s worst faring currencies, and as in other countries, the slide has accelerated since the crash of the Turkish lira.

“The reasons are global. We must bear in mind that in last few months, dollar has strengthened against almost every currency,” said Finance Minister Arun Jaitley recently as he tried to send out reassuring signals that India’s economy is on track.

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The rupee has plunged by about 12 percent this year raising fears of spiraling inflation. VOA

The rupee’s sharp depreciation comes at a time when the economy had recovered from a slowdown and surged to a two-year high in the quarter that ended in June. Forecasts put growth for this year at 7.5 percent.

Economy will slow

But economists warn this momentum will be difficult to sustain as the tumbling rupee, along with rising crude oil prices, takes a toll on growth. India, the world’s third largest oil importer, gets almost 80 percent of its fuel needs overseas.

“The government needs to mellow down on growth aspirations,” said N.R. Bhanumurthy, economist with the National Institute of Public Finance and Policy. “The growth needs to come down to a little less than 7 percent.”

Even as the government faces the prospect of a slowing economy, it is under pressure to lower taxes on gas and diesel to bring down the sharp rise in prices. Fuel is one of the most heavily taxed items in India, with rates as high as nearly 50 percent. Prices vary from state to state, but they have gone up by about 14 percent this year.

Hoping to cash in on the growing disaffection over the surge in fuel prices and the sliding rupee, opposition parties led nationwide protests that shutdown offices and schools in several cities this week.

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Discontent with spiraling fuel prices poses a challenge to Prime Minister Modi’s Bharatiya Janata Party ahead of general elections next year. VOA

The government dismissed the protests, saying that although people faced momentary difficulties, they understood they were because of factors beyond its control.

Political analysts are not so sure, pointing out that fuel prices are a politically sensitive issue in India and usually result in a spike in inflation.

“Anger is rising, there is resentment,” said Satish Misra at the Observer Research Foundation, warning the ruling party will face a backlash “Obviously that is going to have a negative impact on the electoral fortunes of the Bharatiya Janata Party, there is no doubt about that.”

Warnings from economists

Among those who are upset with the high fuel prices is Rajesh Kumar, who commutes 30 kilometers to the advertising agency where he works. Hit by the higher prices that eat into his income, he has started sharing the ride with another employee.

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Narendra Modi. Wikimedia Commons

“I have given up the idea of buying another car,” he said despondently. “I will not be able to afford the cost of running it.”

Economists however have warned the government against giving in to populist pressures ahead of a series of state polls later this year and general elections around April next year. They say lowering taxes on fuel or taking measures to prop up the currency will strain the country’s finances and hurt the economy in the long run.

Also Read: Diverse Gathering To Be Addressed This World BioFuel Day: PM Narendra Modi

“One needs to be more careful and vigilant,” Bhanumurthy said. “It is easy for India to stay with low growth than experiencing the high deficit.”

But there is also some good news for the Indian economy. The falling rupee has given a boost to some of India’s most lucrative exports, such as software services and pharmaceuticals, which add up to billions of dollars. (VOA)