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Falling rupee has become Indian govt's worst nightmare before elections (1 USD = 72.78 Rupees). Here's what it can do

Real reasons of rupee weakening and how Indian govt should tackle it (1 USD = 74.43 Rupees)

While it’s fascinating to see how exchange rates move in tandem with macroeconomic factors, continuous decline in rupee has raised lot of eyebrows lately. Most of the media and publishing houses have attributed this to current account deficit which sits at $48.72 bn, highest since the record $88.16 bn of 2012-2013. While CAD indeed is one of the factors contributing to rupee downfall but certainly it’s not the only one. Few things that might need little consideration before coming onto any judgement:

1. India has never had a trade surplus in merchandise in a decade, means its imports have been higher than exports with crude, gold and diamond being the major contributors. On the other hand, it has enjoyed a surplus in invisible trade (services, software) but not enough to offset merchandise deficit.
2. Crude & Gold are traded in dollars, which means every time we import these commodities, it increases the demand of dollar and simultaneously increases amount of rupees in the market.
3. Not only India, countries like China, UK are also bearing the brunt of rising Crude prices. It’s the balance of payment (BOP) we should be focusing on and not just the current account deficit.

4. Fed has increased the rates to 2.25%, third time in the year, on account of strong growth numbers and mounting inflation of 2.11, highest since 2011. With number of countries pegging their currencies to dollar, high interest would mean high demand of US Treasuries resulting in a stronger dollar.
5. India has enjoyed the status of fastest emerging economy with surging FDI, consequently accumulating reserves. These foreign reserves have so far managed to fund current account deficit but according to a report by IMF, FDI are speculated to go down in coming years. Decreased foreign reserves would again put pressure on Indian rupee by increasing CAD.
In my opinion what India can and should do in order to stop rupee from falling further:

1. Tax Reform: India is still among some of the top countries in the world when it comes to corporate tax which is 34.61%. If India wants to maintain its status of fastest growing economy in coming years, it has to keep attracting foreign income. By lowering their corporate tax, it can induce capital flow and increase demand of rupee. (China’s corporate tax is 25%, US’s is 21%)

2. Repatriation holiday: In a report by ‘The Hindu’ apparently 7000 Cr of Indian money is parked in Swiss banks. By declaring a repatriation holiday (significantly lower or no tax for a day for the money/profits brought back to India) with a condition of not letting them invest in US Treasuries for a specified period, govt can attract lot of conglomerates to consider bringing their money and investing domestically. This may lead to more business and employment.

3. Transparency: This is the key issue that country needs to tackle if they want to be at the top and counted among the fastest growing economies. GST is a good step in that direction but when it comes to transparency and ease of doing business, India is still far behind at 100th position. In 2016, it was at 130th position.

4. Tariffs and Trade treaties: Putting tariffs on goods in order to discourage imports might fuel CAD for some time but it eventually needs a fundamental overhaul to strengthen its foothold on the map. With current US China trade war, India can exploit this opportunity by signing some favorable treaties with countries it majorly imports from.


Author: Mohit Tuteja | MS Finance, University at Buffalo, State University of New York | Master of Management, University of Sydney | CFA Level 1 candidate

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