By K Raveendran
We haven’t had any ‘pearls of wisdom’ from finance minister Nirmala Sitharaman for quite some time. But her latest one on rupee that the Indian currency’s problems are basically because the dollar is strengthening rather than the rupee weakening makes up for the longer than normal interval between her out of the box one-liners.
It was not long ago that the finance minister attributed the problems in the economy and the drop in the tax revenue sharing with the states were an ‘act of god’ in the sense it was caused by the outbreak of Covid pandemic. It is a different matter that the jury is still out on whether the pandemic was caused by natural developments or human intervention. What is most noteworthy is Nirmala Sitharaman’s tendency to over-simplify things.
During a press conference in Washington DC during her week-long official visit to the United States, while answering questions about the record fall in Indian rupee’s value, Nirmala said ‘the rupee is not sliding, US dollar is strengthening’. “I am not talking about technicalities but it is a matter of fact India’s rupee probably has withstood this dollar rate going up,” the finance minister said. “I think the Indian rupee has performed much better than many other emerging market currencies,” she added.
Nirmala Sitharaman’s ‘exposition’ is similar to the ‘half-empty, half-full’ argument. She is partly right and party wrong. As P Chidambaram, her predecessor of long time back, pointed out, it is like the losing candidate in an election saying it was only the other candidate winning.
According to investment bankers, the 20 year highs in the rampaging dollar and 18 percent rise in its trade weighted index in the past year have rewritten the rules of investing in the international financial markets, following which dollar has wreaked havoc with emerging market currencies. There is a huge flow of money towards dollar investments, which means those monies are leaving emerging markets, including India, in bulk.
The dollar’s high-handedness has caused blood bath in the emerging market currencies as well as currency leaders such as the Japanese yen and the euro. With the US Fed going hawkish in terms of interest rates, other currencies are faced with a losing battle of defence. Yen was down to 24-year lows against the dollar, while the greenback pushed ahead against pound sterling to a 37-year peak. The euro has hit a 20-year low as Europe struggles to cope with its energy crisis in the wake of the Ukraine war.
Last week, the rupee plunged by 60 paise to record low levels of 83 for the first time against the US dollar amid unabated foreign capital outflows and a strong dollar in the overseas markets. But the woes of the Indian currency cannot be attributed to dollar strength alone, although the finance minster would like us to believe so. While Nirmala Sitharaman insists that the rupee has been holding out rather well, the fact is that the rupee has underperformed the major Asian currencies. Rupee has held out at these levels thanks to aggressive intervention by the Reserve Bank. But in doing so, the RBI has burnt much of the forex reserves.
According to available estimates, India’s forex reserves got depleted the most among all emerging economies. Since the beginning of 2022, India’s reserves have fallen 13.88 percent from 633.6 billion US dollars to 545.6 billion US dollars as of the middle of last month. Growing trade deficits and escalating cost of imports have made the situation more difficult. According to government of India sources, the country’s merchandise export in April-August was 192.59 billion US dollars, and merchandise imports in the same period was 317.81 billion dollars.
The high cost of oil imports has been a major problem for the deteriorating balance of payments position. With the country depending on imports for over 80 percent of its energy requirements, the outgo on this count is a major draw on government finances. The opportunity to buy large quantities of discounted oil from Russia in the wake of New Delhi refusing to join the western sanctions against Moscow has eased the situation somewhat in the sense it would have been much more difficult otherwise, but the oil import bill continues to be a heavy drain on the exchequer. If the oil price resumes it rising tendency in view of the price-defending cut announced by OPEC-plus cartel, it will spell more trouble for the rupee as well as the country. (IPA Service)