Rupee devaluation becomes major headache for India

NEW DELHI, 5 Jan 2022:

India witnessed its currency sliding further compared to the US dollar as 2021 came to an end, a slump which has continued on and off for four years and increasingly become a burden for its citizens.

From US$1 being equivalent to 63.85 rupees on 1 Jan 2018, the Indian currency had slid to 74.5 rupees per greenback on 31 Dec 2021 – amounting to a 16.68% drop in its value within four years.

The depreciation has been a general trend within the last decade, with rupee devaluing by a massive 64% since January 2011, when US$1 was equivalent to 45.40 rupees.

Well-known Indian economist Santosh Mehrotra cited several reasons behind the rupee’s loss of value in recent years, including the rising prices of India’s imports – especially crude oil.

“Oil prices have kept on increasing, (…) India’s oil demand has grown and therefore its dollar requirement has also increased” leading to the rupee’s devaluation, Mehrotra said.

Another reason given by the expert for the sustained fall in the currency is the interest rates in the South Asian country, currently at their “historically lowest levels,” which make them unattractive for foreign investors.

As low returns dissuade foreign investors, the demand for Indian rupee in the currency market drops, triggering further devaluation.

Mehrotra also blamed the Reserve Bank of India’s focus for economic recovery after Covid-19, which is excessively based on monetary stimulus instead of fiscal policy, said the economist.

He said a fiscal policy stimulus would have put money in people’s hands.

The expert said the uncertainty created by the coronavirus and the ongoing omicron scare has led to “the dollar returning to the US in the search for financial security,” again reducing rupee’s demand overseas.

The devaluation of rupee has led to an increase in the price of imported products apart from a rise in domestic demand, leading to high inflation over the past few years in the country and affecting quality of life.

“Citizens have been hit so hard by the government in recent years that for a large majority of our population it is increasingly becoming a matter of survival,” Mehrotra said.

He highlighted that food prices rose by 31% between July 2020 and July 2021, while oil prices also surged as the government increased taxes.

“All this suggests that the rupee could continue to depreciate further,” the economist concluded, adding that inflation was unlikely to be controlled soon.

However, the devaluation has a positive side, boosting exports from India and helping in balancing its trade deficit.

Anil Bhansali, head of treasury at treasury and foreign exchange consultancy Finrex, said the trade deficit had surged in recent years to touch an all-time record of US$22 billion in December.

“Around a year ago this deficit stood at US$9-13 billion,” he highlighted.

Bhansali added that the rupee devaluation would not be enough to resolve the problem and one needed to “increase manufacturing in the country” and enhance “the quality of exports”.

“We should have increased our manufacturing capacity much earlier, but we couldn’t do it and allowed east Asian countries and China to export much more.”