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BW Businessworld

Wither The Rupee?

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From parents with children studying in US universities to companies that have borrowed in dollars, the depreciation of the rupee has brought all to their knees. The first lot is down in prayer (a Chilkur Balaji temple just outside Hyderabad has created a prayer just for the purpose); the second — unable to roll over their foreign currency convertible bonds — is pleading for official help.

What explains the nearly 20 per cent depreciation in the rupee (it touched 54.30 per dollar on Thursday) since July? Some point to the slower pace of economic growth, but that is true of others. Others point to the Reserve Bank of India's (RBI) inability thus far to rein in rampant inflation and the potential for a depreciating rupee to import more of it (through higher oil and commodity prices, for instance). Separately and together, they are not enough.

True, the dollar has appreciated against other reserve currencies like the euro and the yen by about 10 per cent, simply because of the fight to safety, as investors get nervous about the disintegration of the euro if countries leave it. Currencies of East Asian economies — which have also been growing — have depreciated, just not by as much.

The difference is in the current account; Asian economies run trade surpluses while we run deficits (manageable ones) of
2-3 per cent of GDP. With a savings rate of 33 per cent of GDP and an investment rate of 35-36 per cent, that trade deficit is financed by capital flows.

The big worry: the deficit could get wider, and the flows could stop. One analyst called it the perfect storm: let's hope it doesn't sink the economy.

(This story was published in Businessworld Issue Dated 26-12-2011)