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BW Businessworld

Keeps Tumbling Down

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The exchange rate for the Indian rupee (INR) vis-a-vis, say, the US dollar (USD) is what the currency trading market believes to be the value of the INR versus the USD. It is nothing but a price. And, like any price, it reflects India’s current supply of and demand for USD, as well perceptions of the future supply-demand scenario — which are usually associated with macroeconomic factors such as prospects of growth, fiscal and current account balances, monetary stance, interest rates and so on.
 
Chart A tracks the daily INR/USD exchange rate from 2 April 2012 — the first trading day of 2012-13 — up to 9 July 2013. One can see six phases. The first was a sharp fall up to 25 June 2012, from INR 50.80 to INR 57.14 or a drop of INR 6.34 in a space of 59 trading days. Then it sort of stabilised in the region of INR 55.50 up to end of August 2012. This was followed by sharp but short upsurge to a peak of INR 51.75 on 4 October 2012. It was too good to last. Thus came the next fall to INR 55.64 on 26 November 2012. It meandered thereafter in the range of INR 53.50 to INR 55 up to 30 April 2013, where it was trading at INR 53.69. Then came the big slump which we are witnessing today — a drop of INR 7.09 in 48 trading days to close at INR 60.78 on 8 July 2013.
 
All hell has broken loose. The Prime Minister wants to immediately meet the big industrial honchos.

The finance minister has met with his staff and those of the Reserve Bank; and is making determined
 
noises about reforms. People are talking of another international bond offering of USD 10-20 billion.

Suddenly, for a government that has done nothing of much worth in four years, ‘confidence building exercises’ has become the phrase of the day.  
 
I want to suggest two things. First, the INR/USD exchange rate is an outcome, not a cause. We ignore proper governance for four years; don’t do any reforms worth the name; have low industrial and service sector growth; run a high current account deficit; and put paid to the finance minister’s efforts at controlling the fiscal deficit by announcing an unaffordable food security programme. In such a situation, where do you expect the INR/USD to go? Up? Or down?
 
Second, we are not alone in getting our exchange rate tossed into the dustbin. As Chart B shows, the South African rand (ZAR) has tanked more than us. So has the Brazilian real (BRL). What’s common? Lousy governance and poor economic prospects under Jacob Zuma and Dilma Rousseff. Greenbacks are moving out of weakly run emerging markets. It’s as simple as that. The answer is reforms. But who cares? 

The author is chairman of CERG Advisory.

omkar(dot)goswami(at)cergindia(dot)com

(This story was published in BW | Businessworld Issue Dated 12-08-2013)