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Dreaming up the dollar again

india Updated: May 30, 2013 20:50 IST
Hindustan Times
weak rupee

India's rupee has hit a 10-month low and is slowly inching towards its record nadir of lower than 57 that it clocked about 12 months ago. Blame it on QE3. Or rather it's winding down.

It sounds like the name of a robot, but is essentially financial market jargon for the third round of quantitative easing or QE by the US central bank, the Fed. In plain English, it involves a humongous purchase of bonds by the Fed to pump in loads of cheap money ($40 billion or about Rs 2.24 lakh-crore each month) into the financial system to help the American economy claw out of its worst decade since the Great Depression.

With the United States - that represents about a quarter of the world's economy - showing early signs of turnaround, there are signals that the Fed may start rolling back this stimulus package, effectively taking out funds from emerging countries such as India.

The rupee, first introduced as a silver coin by emperor Sher Shah Suri - who built the Grand Trunk road in the 16th century - has had a bit of tumble over the last few weeks mirroring a growing trend among foreign investors to dive into locations closer home in the US. 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. The sliding rupee isn't good news if you have plans to study and travel abroad. A weaker rupee implies you end up paying more to buy dollars to pay for your fees. A $12,000 course in an overseas university, which would have cost Rs 6.36 lakh (at Rs 53 to a dollar) earlier, will now force you to cough up Rs 6.72 lakh (at Rs 56 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 P Chidambaram 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.

An immediate string of steps to attract dollar inflow such as easing of sectoral caps on foreign investment could, besides pepping up the rupee, also act as the perfect curtain raiser for a long overdue action-packed scene II of India's reforms opera. 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.

A raft of fresh policy pronouncements can be just the right recipe to soothe frayed nerves of investors who fear that the government is more likely to be focused on political risk management rather than reverse the slowdown in the economy.