July 11, 2022
Good morning. In today’s either/view, we discuss whether we need to be concerned about the falling rupee. We also look at SBI’s startup-focussed bank branch in Karnataka, among other news.
📰 FEATURE STORY
What’s The Deal With The Falling Rupee?
Falling can be perceived in two ways, a graceful descent or a horrific crash. When the Indian rupee’s falling value is brought up, it’s hard to tell what kind of landing we’re in for. Now, even the Bank of America has predicted our fears of a record low ₹81 for each dollar may happen. According to experts, this is just a couple of months away.
You don’t need to know much about the economy to understand the gravity of the situation. Or so we thought. As it turns out, the Reserve Bank of India seems to be still defending the Indian rupee. Sectors like information technology, textiles and handicrafts even thrive off a falling currency value. And yet, here we are.
Famed playwright George Bernard Shaw once said, “If all economists were laid end to end, they would not reach a conclusion.” We’re seeing that in action right now. So join us as we try to figure out the state of the economy via our crashing currency and the future.
First off, for the completely uninitiated, let’s look at how the value of a currency is determined. It all depends on floating exchange rates, i.e. the value of one country’s currency in relation to another. This can be tracked as one watches the Foreign Exchange Market, a global market that is decentralised in nature.
The FEM is where the trading of different currencies takes place. Since there is no authority to dictate the value of money, the whole system works on the classic economic concept of demand and supply. Once we understand India’s reasons for a poor currency, we can move on to its impact.
In India’s case, we have been importing more than we should have been. Our exports weren’t necessarily doing too hot. This means there is a higher demand for the dollar than its supply. Thus, obviously, the value of the Indian rupee fell and will continue to fall until we balance this out a bit.
Currently, there are three main reasons for the fall of the rupee, i.e. high crude oil prices, a strong dollar overseas and foreign capital outflows. Don’t worry, we’ll explain all of this.
First, oil. Russia’s invasion of Ukraine has pushed crude oil prices to extreme highs. And since India depends on its imports for 80% of its oil needs, the currency got hit.
The second is the strong dollar. Recently, the US Federal Reserve increased its interest rates. This resulted in an increased return on dollar assets compared to any other emerging economy. Several experts suspect that the Fed might hike rates up even more, thus, further denting other economies.
And finally, foreign capital outflows. Foreign investors have pulled a lot of their money out of Indian markets, especially after the rupee dipped under the ₹75 to the dollar mark. These investors have sold more of their shares than they did during the 2008 Global Financial Crash. As the money flowed out, the Indian rupee took a hit.
VIEW: The dangers of chasing the dollar
Last month, Finance Minister Nirmala Sitharaman said that, compared to other countries, the Indian currency is doing fine. We’re relatively in a better position, says our FM. If anything, this is unexceptional. India exists as a part of the globalised world and will, therefore, be affected by its ebbs and flows. The RBI is also working to keep the rupee as stable as possible. Since late February, it has spent its foreign exchange reserves to maintain the stability of the Indian currency. The goal here is to make things work, and that’s happening.
The rupee has fallen 6% in the first half of 2022. In that time, the euro fell 11.6%, the yen dropped 19.2%, the pound by 13.2%, etc. In truth, the rupee managed to move up against all these other currencies, and the negative press doesn’t do much for one’s blood pressure. In fact, the weak rupee actually helps us win over export markets. Currently, our primary competition circles prices as our level of development cannot afford us a higher quality product. Thus, a drop in currency value leads to low prices and our exports gain momentum overseas. Our focus, instead, should be on inflation control and productivity movement.
According to journalist and economist Swaminathan Aiyar, the exchange rate is often seen “as some kind of [a] virile masculinity symbol.” The reality is that none of these metrics actually make much sense when looked at pragmatically. The Indian rupee has no business comparing itself to the US dollar as the goal of any foreign exchange rate is to keep things competitive. Even China and Japan had followed a weak currency policy to maintain their long-term development goals. If anything, Aiyar says that, compared to our neighbours and fellow emerging economies, the Indian rupee is overvalued.
COUNTERVIEW: Addressing the ground reality
India really relies on its imports. It imports everything from crude oil and metals to electronics. And what does it pay the rest of the world for those imports? Well, all those dollars. Clearly, if the rupee is weak compared to the dollar, Indians will have to pay a lot more for the same quantity of goods. This means that the already high cost of raw materials will continue to rise, and all that production cost gets dumped on consumers. As mentioned before, our focus should be on inflation control, but it isn’t like that exists in a vacuum. A falling rupee will impact inflation most, especially with high oil prices.
Earlier this year, Brent crude oil prices, the global benchmark for oil from the Atlantic basin, jumped from $110 a barrel to $122. In fact, global crude oil prices have sustained themselves above the $100 mark since Russia’s Ukraine invasion. If this keeps rising – and according to reports, they are – the amount we spend on imports also rises. But along with that, remember, the demand for the dollar is rising. This means that our purchasing power is dropping as we speak. Where does this leave the Indian citizen? Under all that inflationary pressure on the Indian economy.
So, what about exports? That seems to be the remaining light in the tunnel, right? Well, think again. A weak currency definitely does help a nation build its export market as its buyers gain more purchasing power. The issue right now is that the global demand has weakened. Lingering volatility caused by supply chain issues and current affairs reports have hurt the exporters’ theoretical win. India’s key export goods are gems, jewellery, petroleum products, organic chemicals, automobiles and machinery. All of these highly depend on imports for raw materials. Everyone outside of textiles needs a lucky tip to survive.
What’s your opinion on this?
(Only subscribers can participate in polls)
a) The weakening Indian rupee is a serious cause for concern.
b) The weakening Indian rupee is not a cause for concern.
🕵️ BEYOND ECHO CHAMBERS
For the Right:
As Zubair Is Hounded By Deliberate Chicanery And Legal Malafides, Is UAPA Next?
For the Left:
Why Guru Dakshina In RSS Is A Unique Celebration In Modern Times
🇮🇳 STATE OF THE STATES
Auditing private universities (Haryana) – The state government is cracking down on private universities for alleged violations of norms. Over the past four months, the higher education department has acted against three universities, including Ashoka university. It had to reserve 25% of its seats from Haryana with fee concessions. However, the university didn’t follow the mandates. The university has refuted these and other allegations.
Why it matters: The state has 24 private universities regulated by the Haryana Private Universities Act (HPU), 2006. Ashoka University is also the state’s partner in the Good Governance Fellowship scheme. Under the HPU Act, 10% of the seats are reserved for scheduled castes. Anand Mohan Sharan from the higher education department said the monitoring is a routine procedure.
SBI branch for start-ups (Karnataka) – State Bank of India (SBI) and Karnataka Digital Economy Mission (KDEM) signed an MoU for the bank to open India’s first dedicated branch for startups in Koramangala. It will come up next month. The agreement involves banking facilities, funding, and credit facilities for startups. They’ll also be given ₹2 crores of collateral-free financial assistance. KDEM will also establish a Fintech Innovation Hub at Mangaluru with SBI as one of the partner organisations.
Why it matters: The state wants to help startups use the Centre’s Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). The state has more than 13,000 startups, and some face a shortage of funds. The dedicated branch will have products and facilities only for startups.
Heritage trees (Bihar) – East Champaran district has the highest number of heritage trees in the state, with 9,630. The number was obtained as the government launched an app in May to collect data on such trees. The department has urged farmers, forest employees, students, and citizens to upload details on the trees in their areas, including photos. So far, information has been collected on more than 9,800 heritage trees.
Why it matters: The state forest department launched the initiative to create a database of trees in the state that are more than 50 years old. Some of the trees also have religious and historical importance. Part of the goal is also to educate people on the importance of trees and how their loss can lead to climate change.
Commission for OBCs (Gujarat) – The state government will form an independent commission to collect and analyse data about the representation of OBCs in local bodies. It comes in the wake of the state election commission ordering the removal of the OBC quota in the upcoming panchayat elections. A press release said the commission would ensure OBC communities will be adequately represented. It will be headed by retired Gujarat high court judge KS Jhaveri.
Why it matters: The apex court said seats are to be reserved for OBC candidates in each local body according to the commission’s recommendations. Under the Gujarat Panchayats Act, 10% of seats reserved are for OBC candidates. The state commission’s decision to scrap it drew criticism from parties.
Delay in projects (Nagaland) – Assam and Nagaland Governor Prof Jagdish Mukh expressed his displeasure over the delays in the construction of a high court complex and a medical college in Kohima. Officials said the pandemic, land issues, and non-release of funds have hampered the progress of the high court. It’s expected to be completed by the end of this year. The hospital will be completed soon and upgraded to a teaching hospital.
Why it matters: The foundation for the Nagaland High Court was laid in 2007, and the medical college in 2014. High court buildings in Nagaland, Meghalaya, Tripura, and Manipur began simultaneously. Except for Nagaland, others have been completed and functioning since 2013. Nagaland is also a state without a medical college.
🔢 KEY NUMBER
₹13,000 crores – The value of India’s defence exports for 2021-22. It’s a 54.1% increase from the previous year. India’s main customers are the US, the Philippines, and other countries in South-East Asia.