The Falling Rupee

In 2008, when the American economy was in crisis our economy was affected. Now when it is recovering too, our economy is affected.Why Indian Rupee too sensitive? Why it is losing its shine? Why nobody wants to purchase our currency?

The American Central bank is attracting liquidity by quantitative easing (a method by which central bank infuses cash into the economy, by providing credit to the financial institutions through purchase of their assets). This lucrative offer is alluring the investments in other countries back to their homeland.Albeit all the currencies have nosedived in response to the global scenario, Rupee was ahead in the slid.Our ever widening Current Account Deficit has done the mischief. 

Imagine the Indian economy and Rupee similar to a house hold which is exchanging in silver coins. If all the traders are demanding that payment should be made in terms of gold coins only, they have to purchase gold coins in exchange of silver coins for making payments.If there is more demand for gold in the market apparently from other households also whose medium may be coins other than silver, there will be reluctance to accept silver coins in exchange of gold coins in the market.Thus the value of silver goes down. In addition to this if expenditure of the household is more than the income, they will have to borrow gold. Thus they end up in a debt cycle, which can be fatal, otherwise alternate source of income is explored.

We are depending on the imports for the lion's share of our crude oil demand. We cannot control our love for the yellow metal also. (The RBI data shows 30 percent of the trade deficit for the previous two years was due to gold imports).These two are the major draining factors of our foreign exchange.

The war looming over Syria has inducted fear in the market and the crude prices shot up. Mean while Loksabha gave consent to the Food Security bill which may further adds to the fiscal deficit. The capacity of our economy to contain the fiscal deficit and CAD is despised. Along with this dagger hanging over the head, foe in the form of inflation also ailing the economy. Fewer investments, waning industrial growth ,lesser job opportunities etc are adding oil in the fire.

We have to save our currency by hedging the gap between the Rupee and the Dollar. The currency swap arrangement -paying in terms of currency equivalent to another currency, as we have with Japan and Bhutan can help. Otherwise pacts such as the agreement with Iran,whose economy is tightened by US sanctions, to pay in Rupee for crude oil can also help.