Rupee on a slide

THE downslide of the rupee against the dollar continues unabated. About three months ago, it fell to a 15-month low. The downtrend, although unrelenting, also saw some occasional pauses and recoveries. Finally, it has plummeted below the psychological 70-mark. It was hoped that PM Modi’s rosuing speech on the occasion of Independence Day, which was focused on India’s socio-economic development, would halt this free fall when the market reopened. The rupee, however, showed no signs of recovering and had fallen to a record low at 70.32 in the opening trade on Thursday.

Top officials of the Finance Ministry distanced themselves from the phenomenon saying that the fall was triggered by ‘external factors’. They  remaine sanguine because the depreciation has been in line with other competing currencies. Cabinet minister Arun Jaitley tried to comfort the market by saying that the global risk aversion towards emerging market currencies was due to the recent developments in Turkey. His statement that ‘India’s macro fundamentals remain resilient’ is, indeed, reassuring, especially when the country is back on the higher growth trajectory after twin disruptions of demonetisation and hasty implementation of the GST. While the cushion of over $400 billion forex reserve is comforting, the latest data indicates softening of inflation.

It is, however, not sufficient that the government is ‘closely’ monitoring ‘external’ developments. Headwinds of volatile geopolitical situations — the trade war between the US and China and the spat between Turkey and America — could be either boon or bane for India, depending on its preparedness. The country’s export sector is ill-equipped to reap the benefit of currency depreciation. On the contrary, it is compelled to import costly crude oil, because it could not contain the country’s hunger for fossil fuel. As a result, the trade deficit widened to over $18 billion in July, a five-year record. Currency depreciation for an ill-prepared economy could be catastrophic. The government must take policy measures to encourage exports and strengthen its manufacturing sector to reduce import overdependence.