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 worryingly 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
too 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. Its as simple as
that. The answer is reforms. But who cares?
Published: Business World, August 2013
