Editorial: Rupee slides, stakes rise

The fall of the rupee against the dollar, especially the breaching of the Rs 90-mark, was expected as the artificially buttressing of the rupee has not been opted for. The Reserve Bank of India is taking chances with regard to the market, which it rightly believes are “deep and efficient” and will eventually stabilise the rupee. The bank, however, will and should keep an eye on any abnormal or excessive volatility.

By now, it is clear what has led to the fall in the value of the rupee. On top of the list are the punishing tariffs and the stumbling blocks in trade talks, especially with the US; even with Europe, it is taking longer than expected. The direct impact aside, these developments have dampened sentiment and hit confidence. Secondly, the changing risk calculations of foreign investors are making them exit, taking billions of dollars with them. Besides currency fluctuation worries, the high valuations of Indian stocks and the underwhelming performance of corporates in the first two quarters have also nudged foreign investors to leave. Thirdly, unlike in the past, this time around the RBI is letting market forces determine the rupee’s value, instead of artificially propping it up.

The decline in the value of the rupee and the consequent increase in retail inflation are going to impact average Indians, as household spending is bound to increase and savings and quality of life decline to some extent. Many middle- and upper-middle-class households have availed of educational loans and will have to shell out more to service them. This would not have impacted the decision-making of Indian families, which tend to attach significant value to a foreign degree and the possibility of their children earning in dollars. But given the overall uncertainty in visa regimes in the US and elsewhere, this too might make them think twice. Likewise, many might consider deferring foreign vacations. However, rupee depreciation is good news for exporters, but they are bogged down by other problems to take full advantage of the situation. The only section to benefit is NRIs and their families back in India.

That the Indian rupee has been Asia’s worst performer is going to impact not only the economy but also politics. Opposition parties have been criticising the BJP-led government, saying the falling rupee has punctured holes in the government’s claims regarding economic growth. The BJP’s jibe against the then UPA government, linking the falling rupee to the government’s ability and strength, returns to haunt it each time the rupee breaches a psychological mark. Now it is the turn of the Opposition to pay it back in the same coin. Though the NDA government benefits from a docile media and its vice-like grip over narratives across platforms, it will be increasingly difficult to hide its feet of clay from public view.

For now, the RBI is confident about the rupee’s resilience to bounce back and, of course, the policy tools in its armoury and the adequate foreign exchange reserves in its kitty to weather any storm. It is the government that needs to get its act together to deliver on multiple fronts — economic and financial management on the one hand, and the more difficult foreign policy gambit relating to global trade. It will be an uphill battle that will test the government’s mettle beyond politics.