Govt, RBI need to work together to shore up rupee

USA is the richest country in the world with strong economy. So all other countries will trust the dollar and rely on it to do business with each other.

You would not want to take in a load of currency when doing business and found next day the money you took in yesterday lost 5 per cent of its value. Recent global problem has changed the situation a lot. USA has accumulated heavy debt and the government is printing money which has no substance to back it up and other countries became to mistrust the USA dollars gradually, hence a few countries began to buy gold which is the ultimate universal property to fall back on.

There is no doubt that, the Indian rupee has depreciated to an all time low with respect to the US dollar. On August 28, 2013, the rupee had gone down to 68.82 against the dollar but the situation was somewhat revived by the Reserve Bank of India that decided to open a special window for helping state owned oil companies – Indian Oil Corp Ltd., Bharat Petroleum Corp and Hindustan Petroleum Corp by which beneficiaries will be able to buy dollars. These companies, together, require about 8.5 billion dollars every month to import oil and it is expected that this will help them meet the requirements.

The central banks across Japan and countries in the Euro zone have been bringing out a lot of money and this has meant that both Yen and Euro have lost their value. Compared to this the US Federal Reserve is giving hints that it will end the fiscal stimulus so that the dollar becomes stronger with respect to other currencies such as the Indian Rupee at least for the time being. Till now in 2013, the US dollar index has become stronger by 1.91 per cent.

The price of crude oil has been skyrocketing. This implies that as and when the demand for oil increases in India or there is an increase in oil prices in the global market, there also arises a need for more dollars to pay the suppliers. This also results in a situation where the worth of the INR decreases significantly in comparison to the dollar. India’s import bill has been going up of late and most of this can be attributed to gold. Gold alone takes up more than 10 per cent of India’s import bill – in April 2013, 141 tons of gold were imported and it went up to 162 tons during May.

Big problem

The fall in the rupee has not only given rise to debates with regards to macro-economic theories like lowering economic growth, corporate earnings and market volatility but for the common man, the falling rupee is going to hit where it hurts the most- the pocket.

The inflationary tendencies had already been creating a big problem. Now the weakening rupee has made crude oil, fertilisers, medicines, and iron ore which India imports in large quantities costlier.

Nevertheless, the combination of a recovering global economy and rupee depreciation is likely to benefit stocks that have sizable non-Indian revenue exposure. “The combination of sharp rupee depreciation, the quantum of depreciation relative to India's exporting peers and recovery in the developed markets  give us confidence that Indian exports may grow at a robust pace, following nearly two years of anaemic growth,” the report said.

The brokerage has identified following stocks as key prospective beneficiaries of rupee depreciation which are TCS, Tata Steel, Hindalco, Tech Mahindra, Infosys, Wipro and Reliance Industries.

Experts are saying that the government needs to take some short and medium term steps that will help the economy get back on its feet yet again. It is only through continued efforts that the Indian government will be able to retrieve the situation. However, it will take a Herculean effort to help the INR get back to the 55 mark.
(The writer teaches in dept of commerce, Christ University)