‘Weak rupee can wreak havoc’
After the rupee hit a record low last week, economist
Abhirup Sarkar tells Indrani Roy what needs to be done
May 25, 2012
The rupee closed at a record low of 54.47 against the dollar May 16, and hit new record intra-day lows over
the next two days — 54.89 at its worst — till
Abhirup Sarkar, economist and professor
at the Indian Statistical Institute, explains
why this was expected and what steps need
to be taken to curb the downfall of the
Why is the value of rupee heading south?
This fall in rupee was bound to happen.
Though a number of reasons led to the
rupee crisis, this is directly related to the
financial mess in Greece that has kept the
euro-zone on the edge.
The challenge for India now is to generate domestic demand and ensure growth in
the rural sector.
What led to the present crisis?
For some time, Indian industrial growth
was falling as a result of which companies’
profitability was decreasing. This made the
foreign institutional investors lose incentive. That, in turn, had an adverse effect on
the Indian markets.
Increasing capital outflows mean a fall in
Sensex and a subsequent depreciation of
the Indian rupee.
What are the implications of the rupee
A weaker currency pushes up any country’s import bill — one pays more rupees for
the same amount of dollars — and adds to
the current account deficit.
A weaker currency is a signal to investors
that the economy is not being well-managed. India has a huge import bill mainly
because it buys almost 80 percent of its oil
A weak rupee can wreak havoc.
What measures can the RBI take?
Direct intervention: In case of any currency movement, a country’s central bank
can directly intervene to either push the
currency up, as India has been doing, or to
keep it artificially low.
To push up the falling rupee RBI can sell
dollars. When it needs to keep rupee lower,
it can buy dollars.
Indirect Intervention: A central bank can
also intervene indirectly by regulatory
action. In the last few weeks, RBI has
relaxed caps on the interest rates for foreign currency non-resident deposits to
attract depositors to put more dollars into
such accounts. It has also allowed banks to
self-regulate export credit limits.
May 10, it asked exporters to cut by half
their dollar holdings in exchange earners
foreign currency so that more dollars can
be pumped into the system.
The RBI, however, is caught in a cycle. It
has to battle inflation, liquidity crunch and
a falling rupee at the same time.
To manage inflation, the RBI must keep
rates high and liquidity tight, but that can
hinder economic growth and push the currency down.
Slower growth makes India an unattractive destination for foreign investors, which
in turn affects dollar flow.
If it sells dollars to support the currency,
that too sucks liquidity out. But if it releases too much liquidity into the system, inflation could go into double digits and push
the value of the rupee down, completing
the vicious cycle.
The 202% fall 1990: 1 dollar = Rs 18.11 991: 1 dollar = Rs 25.79 1992: 1 dollar = Rs 28.95 1993: 1 dollar = Rs 31.44 1994: 1 dollar = Rs 31.39 1995: 1 dollar = Rs 34.92 1996: 1 dollar = Rs 35.83 1997: 1 dollar = Rs 39.15 1998: 1 dollar = Rs 42.58 1999: 1 dollar = Rs 43.45 2000: 1 dollar = Rs 46.88 2001: 1 dollar = Rs 47.93 2002: 1 dollar = Rs 48.23 2003: 1 dollar = Rs 45.66 2004: 1 dollar = Rs 44.00 2005: 1 dollar = Rs 46.11 2006: 1 dollar = Rs 44.49 2007: 1 dollar = Rs 39.33 2008: 1 dollar = Rs 49.82 009: 1 dollar = Rs 46.29 2010: 1 dollar = Rs 45.09 2011: 1 dollar = Rs 51.10 2012: 1 dollar = Rs 54.47
In a shop in Jammu, May 16. The rupee closed
at a record low against the dollar that day
MUKESH GUPTA/ REUTERS
What options does the government have?
Over the years, government spending has
increased and investment has decreased.
This has led to a sharp rise in deficit. Now
the government is in a fix.
If it increases the tax burden on companies, that will drive away the foreign institutional investors from the market.
If it opts for issuing fresh currency notes,
that will have an inflationary effect.
Of late, rating agency Standard & Poor’s
downgraded the country’s outlook from
stable to negative. This hampered India’s
India can grow at 8 to 9% for 20 years: Montek Ahluwalia
SUMAN GUHA MOZUMDER
Montek Singh Ahluwalia, deputy chairman of India’s planning commission, last week highlighted
India’s potential to grow at rates
between 8 or 9 percent for the
next 20 years and in an inclusive
He told the United Nations
General Assembly, during a high
level debate on ‘State of the World
Economy and Finance in 2012,’
that there were many challenges
India had to face domestically to
achieve this target, but the coun-
try was confident of meeting the
challenges in a supportive global
environment. He said India was
willing to work with other nations
to make it so.
Alhuwalia spoke of how the
Indian economy grew at an aver-
age rate of 9 percent in the five
years prior to the beginning of the
economic crisis, but slowed down
to an average of just about 7 percent following the global cri-
Montek Singh Ahluwalia at the debate on ‘State of the World Economy and Finance in 2012,’ at he UN General Assembly, May 17
policy, there are sharp differences on how to proceed and
many distinguished economists argue that fiscal austerity is
actually the wrong medicine in the circumstances.’
Ahluwalia said the problem got more complicated because
countries were not dealing with a crisis in one country but
in several countries in the industrialized world.
He said, ‘Given the high degree of inter-connectedness
between these economies, we would get much better results
if the response was in the form of coordinated national poli-
cies. This would also help mobilize domestic public support
for difficult policies by showing that they are part of a glob-
al effort to deal with the problems, in which other countries
are doing their bit.’
He rued the lack of institutions of global economic gover-
nance, which could produce this kind of policy co-ordina-
‘The economic woes we face today cannot be overcome
without the major developed countries taking the lead to
stimulate economic growth. There is an urgent need for far-sighted leadership, which can call for tough decisions while
managing popular aspirations.’ he added. ‘Steps at the
national level must be accompanied by a broader based
advance in improving global governance. The most pressing
challenge is the reform of the international financial system
giving important developing countries more voice and participation in the decision making structures.’