The Indian Rupee Keeps Falling While New Delhi Scrambles for Solutions

  • Share
  • Read Later
Kunal Patil / Hindustan Times via Getty Images

Onlookers standing outside the Bombay Stock Exchange react as they watch share prices on the facade of the BSE building in Mumbai on Aug. 19, 2013

The rupee is in trouble, and nobody seems quite sure what to do about it. The Indian currency closed at an all-time low of 64.11 against the U.S. dollar on Wednesday alongside a tumbling market, feeding widespread anxiety over the fact that the government has yet to curb the currency’s downward trajectory since it started tumbling in May. On Wednesday, Deutsche Bank issued a report saying the rupee may reach as low as 70 in the coming months.

It’s the latest bit of unwelcome news in a bad few years for the Indian economy, which has slowed from its rapid 9% growth rate to a forecast of between 5.5% and 5.7% for this fiscal year.

Why is it the rupee’s turn to take a beating? Part of the problem is not India’s alone. With the U.S. Federal Reserve expected to start tapering off a stimulus program that has pumped cash into the global economy, investors have grown wary of the emerging markets they became so fond of in recent years. Countries running their own current account deficits (CAD) have borne the brunt of the mood swing: currencies in India, Brazil and Indonesia, among others, have seen drops as investors pull money out ahead of the Fed’s anticipated tightening.

(MORE: The Clash Between Two Famous Indian Economists Echoes Larger Battle)

That problem may be global, but the fact that the Indian economy has some homegrown structural problems has exacerbated the flight of foreign funds. “If you’re an investor, you want to put your money where there’s going to be growth,” says Daniel Martin, an economist with Capital Economics in Singapore. “The shine has come off India. It’s not the glaring success story it was a few years ago.”

That’s not a new assessment, but it’s important now because it means that the core issues slowing down Indian growth are now hurting its currency — and, by proxy, Indian consumers who want to buy, say, an imported phone, or foreign carmakers that need to import parts. Those fundamental weaknesses — poor infrastructure, unreliable power supply, difficulty in securing land and lots of sticky red tape — are all keeping foreign investment out of the country, and that’s a problem for a country that imports far more than it exports and thus needs to finance a large current account deficit. When the CAD widens, the rupee’s decline accelerates further. So even at a time when many emerging markets are looking risky to investors, India is looking riskier than most.

(MORE: In India, Gold Glitters but Brings Economic Woes)

The government is attempting several things to stem the rupee’s decline, including trying to reduce the CAD by increasing import taxes on gold and limiting how much money Indians can send abroad. In July, after the rupee hit an earlier low, the Reserve Bank of India made moves to raise interest rates to tighten liquidity in the domestic market. That didn’t help, and this week, the bank changed tack, announcing it would take action to flow more cash into the economy to bring interest rates down and usher in growth. The move caused markets to open on Wednesday on a note of optimism, but that fizzled by the end of the day.

Some analysts worry that this kind of policy turnaround could be read as a further sign of weakness by investors. Then again, longer-term lower interest rates are in keeping with what many say will ultimately help get the economy back on track. Some even speculate that the rupee’s decline could have unintended but welcome benefits. Capital Economics, in a report published on Aug. 20, pointed out that a weaker rupee could help exports grow — in short, “exactly what is needed over the long run to narrow the current account deficit and reduce India’s dependence on volatile financing from abroad.”

MORE: In India, Development Fuels Disputes Over Land