The sinking rupee and its fallout – Cover Story News

In cricket, what separates 99 from 100 is just one run. But it is the century that gets the batsman applause and a place in the record books. The psychological threshold for the Indian rupee against the dollar was 80. Never mind that when it crossed 75 to the dollar last March, it had already plumbed an all-time low. Yet, when the Indian currency first went past the 80 mark briefly on July 19, and again the day after, it had breached the high water mark and saw panic buttons being pressed across economic stations, including in government circles.

In a written statement to Parliament, Union finance minister Nirmala Sitharaman on July 18 cited global factors such as the Ukraine war, the soaring crude oil prices and the worldwide financial squeeze for the fall of the rupee (79.96 on that day). Thus she absolved the Narendra Modi government of which she is a part of any blame. She also pointed out that other major currencies like the British pound, the Japanese yen and the euro had weakened more than the rupee and that the Indian currency had, in fact, strengthened against these currencies. Indeed, the British pound has declined 12.27 per cent between December 31, 2021 and July 15, 2022 and the euro by 11.3 per cent compared to the six per cent decline in the rupee’s value in the same period.

If the finance minister sounded a tad defensive, it was because the prime minister, when he was chief minister of Gujarat, had blasted then prime minister Manmohan Singh for the sharp depreciation of the rupee in 2013. Now the boot is on the other foot. Shashi Tharoor, a prominent Congress MP, told news agency ANI, “Modiji is the one who made this an election issue in 2014. In fact there was talk about the fact that he was going to strengthen the rupee when he came because it shows a weak government, and therefore a weak rupee but then what is the strong government giving us? An even weaker rupee.” Congress leader Rahul Gandhi took to Twitter, stating, “Rupee reaches 80. Cooking gas has surged over Rs 1,000. 1.3 crore people are unemployed in June, the government will have to answer.”

The rupee’s slide was always expected. With the world embroiled in geopolitical, health and economic turmoil, currencies across the world have plunged (see above – Ahead Of The Pack). The rupee, too, has been under immense pressure, especially since Russia invaded Ukraine on February 24. Till then, the rupee had depreciated just about 0.3 per cent against the dollar, but has fallen 6.9 per cent in value since. A combination of factors have abetted its fall, chief among them the Russia- Ukraine conflict triggering a steep hike in fuel prices and the US Federal Reserve’s aggressive rate hike policy resulting in massive capital outflows from emerging economies, including India. NSDL (National Securities Depository Ltd) data shows that foreign portfolio investors have sold more than $30 billion (approx. Rs 2.4 lakh crore) worth of Indian assets to date since January 2022, the highest-ever outflow.

That the Modi government was not unaffected became clear when the Reserve Bank of India (RBI) started frantically dipping into the country’s foreign exchange reserves to shore up the rupee and prevent it from depreciating beyond 80 to the dollar. India had reserves of $630 billion (Rs 50.4 lakh crore) before the war in Ukraine began in late February. On July 8, they stood at $580 billion (Rs 46.4 lakh crore). This is mainly because the RBI sold around $50 billion (Rs 4 lakh crore) to shore up the rupee and prevent wild fluctuation and the ensuing financial chaos. Despite the depletion, India still has enough forex reserves to allow it a 10-month buffer of imports should the need arise. The reserves are also more than double of what India had during the global financial crisis of 2008 and the ‘taper tantrum’ of 2013. Why then is 80 to the dollar such a psychological benchmark that the central government and some sections of the industry have broken out in a cold sweat over it?


Economists believe 80 to be the tipping point after which the rupee can go into free fall, causing widespread disruption in the government’s finances and business plans. For the aam aadmi, a weak rupee will lead to what economists call “imported inflation”. Thus prices of consumer goods such as air-conditioners, smart phones and motor vehicles, particularly those requiring imported components or parts, could see a steep increase. The cost of fuel, especially imported crude oil and gas, will also shoot up, forcing the government to either make the consumer pay and face public wrath or absorb the increase and see a decline in revenues.

A weak rupee is also likely to affect aspects of middleclass life. Going on foreign vacations will become expensive, as will education for children abroad, especially in the US. Combined with high fuel prices, including for aviation turbine fuel, and the continuing fallout of the pandemic, the rupee’s fall has made air travel prohibitively expensive. The cheapest economy class return ticket to the US listed on online travel sites costs an average Rs 1.35 lakh from Rs 80,000 not so long ago. Those who have children studying in US universities could find tuition and accommodation bills swelling by over 10 per cent.

For the Modi government, the falling rupee could adversely affect its finances. India is a net importing nation. Its oil import bill doubled to $119.2 billion (Rs 9.52 lakh crore) in 2021-22 from $62.2 billion (Rs 4.97 lakh crore) in the previous fiscal year. Fertiliser subsidies constitute a major chunk of government spending—this year’s budget provided an additional support of Rs 1.10 lakh crore, taking the total subsidy to Rs 2.15 lakh crore for the current fiscal. However, following the rise in fertiliser prices on the back of a global shortage and the falling rupee, experts predict that the bill could inflate further. With global fuel prices escalating, the government resorted to excise duty cuts on petrol and diesel in May to ease the burden on consumers. This was expected to cost the government exchequer around Rs 45,000 crore. However, as Brent crude prices softened to $106.96 per barrel (as on July 20), the government lowered the ‘windfall levy’ on domestic crude and removed the additional excise duty on petrol exports while cutting that on diesel exports from Rs 13 to Rs 11 the same day. The cess on domestically-produced crude was cut 27 per cent to Rs 17,000 per tonne from Rs 23,250 per tonne. The damage control measure could come at the cost of loss in government revenue. Worse, retail inflation may stay in the high 7 per cent zone. Crisil chief economist D.K. Joshi says, “A high inflation rate will injure purchasing power, especially of the poor. On a net basis, the weakening of the currency will have a more adverse impact on the economy.” (See accompanying BITE, Arresting the Fall.)

For industry, the fall of the rupee is a mixed bag. Much of its worry stems from the rising import bill and higher costs for servicing loans. A Crisil analysis of the financials of over 300 firms (save finance ones and those in the oil and gas sectors) shows that corporate profitability dropped 200-300 basis points in the June quarter over the year before. Exporters, though, especially ones that rely largely on domestic raw material, may have some cause for cheer. Conventional wisdom has it that a falling rupee is good for exports. India’s merchandise exports have been booming, crossing $400 billion (Rs 32 lakh crore) in FY22. But India’s trade deficit (the difference in the value of its imports and exports) in June was at its highest ever at $26.2 billion (Rs 2.09 lakh crore), after it had widened to a record $192.24 billion (Rs 15.4 lakh crore) last fiscal.

India’s software exports have certainly shown an uptick. According to the RBI, software services exports went up by 2.1 per cent to $148.3 billion (Rs 11.8 lakh crore) in 2020-21. But analysts say that any advantages from a weak currency will be offset by higher salary costs in the wake of high attrition, higher sub-contracting costs and high pricing pressures. A weaker rupee could help soften some of these pain points, but for the moment the sector has been downgraded—JP Morgan downgraded major Indian IT firms from neutral to underweight.

The falling rupee is also expected to help exporters of auto components. But as Khalid Khan, 54, of JECO Trading Corporation and vice-president of the Federation of Indian Export Organisations (FIEO), says, “While a weaker rupee does help exports in certain products, it balances out where import content is high. While exports have been gaining, demand from countries like the US is declining. Order books are not as good. The bottom line is that there must be demand.” Textiles is another sector likely to benefit from a weak rupee but manufacturers again are not very optimistic. As Rahul Mehta, president of the Mumbai-based Clothing Manufacturers Association of India (CMAI), explains, every time the rupee depreciates, the advantage is very “short-lived and temporary—future buyers factor in the rupee value when negotiating prices. Plus, competing currencies too are depreciating”. The pharmaceutical sector has similar problems. Any benefit from a weak rupee will be negated by the high cost of imported active pharma ingredients. Some segments source nearly 60 per cent of their inputs from abroad.


The worst may have come to pass, but there is a silver lining too—the rupee has fared better than currencies in other emerging markets, be it the Turkish lira, the Thai baht or even the Japanese yen. The lira has lost 22.34 per cent of its value since December 2021, the yen 16.95 per cent, and the baht about 8.75 per cent. However, Nilesh Shah, managing director of Kotak Mahindra AMC, cautions, “We have always followed that a weak currency supports exports. But our inflation is higher than that of our trade partners and productivity lower. It is a misconception that a weak rupee will support exports, that unless I depreciate, I won’t remain competitive. There is a fallacy in Indian policymaking.” Former finance secretary Subhash Chandra Garg concurs: “Ninety per cent of trade is invoiced in dollars, even though the euro and yen have been internationalised. We need real reforms on the government policy side.”

“Our policymaking follows the fallacy that a weak rupee aids export. We have higher inflation and lower productivity than our trade partners”

– NILESH SHAH, MD, Kotak Mahindra AMC

In addition to using forex reserves to shore up the rupee, the RBI has taken other measures, including attracting overseas capital. Banks have been given room to offer higher interest rates on Foreign Currency Non-Resident Bank (FCNR-B) and Non- Resident External Rupee deposits—the SBI and ICICI have already done so. The central bank also announced an increase in the quantum of funds Indian firms can raise through external commercial borrowings. International trade settlement in Indian rupees, too, is permitted now with five trading partners, a move market analysts see as the beginning of the internationalisation of the INR.

Meanwhile, the trade deficit for Q1FY23 touched $70.8 billion (Rs 5.6 lakh crore) compared to $31.4 billion (Rs 2.5 lakh crore) in Q1FY22. It is expected to only rise further, with some suggesting it could touch a record $250 billion (Rs 20 lakh crore) this fiscal, or 7.3 per cent of GDP. This could imply a Current Account Deficit (CAD) of up to 3 per cent of GDP. A widening CAD and persistent FPI outflows could plunge the rupee further. Says Garg: “This year, as things stand, we might end up with very small positive flows; we might even dip to the negative side. That would depreciate the rupee further. What level is the RBI defending? It can defend only up to a point.”

Experts say the government can work with the RBI to alleviate the pain. “The government has to follow economic policies to address the CAD,” says a Mumbai-based economist. “They have taken measures that are widening the trade deficit.” These include raising the export duty on steel, petroleum products, banning wheat export, placing sugar in a regulatory regime, regulating rice exports. On the imports side, a few of the recent measures have been counter-intuitive, such as the rush to import coal or raising the import duty on gold, which could encourage its smuggling. India’s dependence on petroleum products could have been reduced through consistent focus on renewables, but complicated policy frameworks have stunted growth in the sector. Export of services, too, is running on one engine—the IT sector. India needs to fortify capabilities in other services such as education and health. While the RBI has a big role to play in the capital economy, which tracks capital movement into and out of the country, the government can play a big role in the real economy, which has to do with investments and growth on the ground. “If we don’t handle the capital account well, it could aggravate the situation,” cautions Garg.

“Ninety per cent of trade is invoiced in dollars, even though the euro and yen have been internationalised. We need real reforms on the government policy side”

– SUBHASH CHANDRA GARG, Former Finance Secretary

Politically, a falling rupee is bad news for the government. There were apparent differences between Mint Street and FinMin over whether the RBI, through its interventions, ends up creating panic when there wasn’t reason to. However, market insiders vouch for the RBI’s ability to manage the currency, as long as it sticks to managing volatility and not fix a level for the rupee that market forces can determine. Many believe the rupee should be allowed to depreciate freely to find its right value, while others hold a weak rupee as symptomatic of India’s inefficiencies. Many think it’s time India began its journey to internationalise the rupee. D.K. Srivastava, policy advisor at EY India, says: “Currency should have asset value rather than merely exchange value.”

There is consensus, however, that India needs to prepare to take advantage of the changed power equations in the post-war world. Robin Brooks, chief economist at the IIF (Institute of International Finance), has termed the fall of the euro as ‘The End of the Beginning’. In a tweet on July 14, he wrote that Russia’s invasion of Ukraine is a seismic shock for the Euro zone because so much of the European growth model has been predicated on cheap Russian energy. The global backlash against China can also be an opportunity for India. We need to follow a multi-pronged approach, from internationalising the rupee to aggressively investing in education and technology. If India has to have a strong currency, lower interest rates and rising prosperity, it must generate employment-intensive growth and pursue a bold economic vision. Do we have it in us?

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