The Reserve Bank of India’s (RBI) recent decision of giving local exporters a fortnight to convert half of their foreign-exchange holdings into rupees is symptomatic of the anxiety gripping India’s macroeconomic managers. Any textbook primer would tell us that currency markets, pretty much like
most commodities, are largely governed by the laws of demand and supply. Stronger demand for a currency will push up its price and vice versa. If the RBI has asked exporters to convert dollars to local currency, it would imply that the central bank expects the rupee to worsen.
The rupee, first introduced as a silver coin for transactions by emperor Sher Shah Suri — who built the Grand Trunk road in the 16th century — has tumbled since April 2011, mirroring a growing trend among foreign investors to dive into safer locations closer home in the US. The sliding rupee isn’t good news if you plan to study or travel abroad. A weaker rupee implies you end up paying more to buy dollars to pay for your fee. A $12,000 programme in an overseas university, which would have cost Rs. 6 lakh earlier when a dollar was worth Rs. 50, will now force you to cough up Rs. 6.48 lakh (at Rs. 54 to a dollar), even though the fee in dollar terms remains unchanged. Likewise, an expensive greenback will make an overseas holiday costlier.
For finance minister Pranab Mukherjee and RBI governor D Subbarao, a persistently weak rupee adds to an array of problems, graver than just mounting travel and college expenses. An imploding Europe, India’s biggest export market, could negate much of the exporters’ gains from a weak rupee as orders dry out. Costlier crude oil and the resultant increase in fuel prices will knock up prices of most goods. It will also widen the current account deficit — the gap between export earnings and import payments — which is worrying for an economy that is slowing down. A weak rupee is also a warning sign of dipping investor sentiment that has come to characterise the world’s largest democracy over the last several months. So, what’s behind the sudden turnabout in an economy, which until not so long ago was the global investors’ preferred hotspot? It appears that domestic uncertainty is hurting India’s prospects more than external factors. If foreign investors continue to pull out fearing policy missteps, there isn’t much that Mr Subbarao can do to thwart the rupee, which only two years ago joined the elite club of symbol-endowed national currencies — which includes the dollar, the pound, the euro and the yen — from plunging to new lows. Moves such as asking exporters to convert forex holdings into rupees will, at best, work as a temporary balm.