The Indian Rupee is at its all-time low against the dollar due to unprecedented inflation amid the Russia-Ukraine crisis and global instability. From Rs.74.64 for 1 dollar in February (the beginning of the war), it has come down to Rs.82.46 for 1 dollar on October 28, a drop of about nine per cent in its value.
Finance Minister Nirmala Sitharaman’s “Rupee is not depreciating, the dollar is getting stronger” statement is being discussed all over the country. There has been a flood of memes, especially on online platforms, and the minister has been subjected to fierce criticism on social media. Seasonal scholars associated with the various political parties and social media celebrities, whose knowledge about the factors affecting the world economy and currency exchange rates is minimal. They have taken the lead in the propaganda, and instead of educating, an attempt has been made to ridicule this severe issue.
A statement by an educated and experienced finance minister, who has presented four budgets of the country, needs to be discussed holistically without any bias. It is to be noted that significant world currencies have underperformed (mostly in two digits) against the dollar over the past year. The British Pound has lost 18% against the dollar, while the Euro has depreciated nearly 17%. The Indian Rupee has declined by 9% to date, almost half as compared to the rest of the developed countries. On the other hand, the Rupee’s performance against the currencies of major countries is remarkable. The Rupee has increased by 10% against the British Pound and 8% against the Euro.The Congress party is loudly publicizing the speeches of BJP leaders during 2004 – 2014, especially the speeches of Prime Minister Modi, given as the Chief Minister of Gujarat or during the 2014 elections, as the Prime Ministerial candidate of the Bhartiya Janta Party. Under the Congress Party’s rule between 2004 and 2014, the Rupee’s performance was highly disappointing, and the BJP made it a big issue. During the Congress regime, the Rupee depreciated against the dollar and almost every primary currency of the world. But it strengthened against the most important currencies (Pound, Euro, Australian dollar) between 2014 and 2022. The fact is that the Indian Rupee has performed better against almost every global currency under the current BJP government as compared to the then Congress government.
The Congress party’s allegation that the Rupee’s value fell against the dollar during the tenure of Prime Minister Modi, when seen based on facts, presents a different story. Since 2014 (Modi 1.0) till date, the decline in other major currencies against the dollar is much higher than the Indian Rupee. Surprisingly, in the decade of 2004 – 2014 (Congress government at the centre), there was a tremendous appreciation in major global currencies against the dollar, and the Indian Rupee was also expected to appreciate. Still, we were unfortunate that the Rupee depreciated even with a prime minister like Dr Manmohan Singh at the helm of affairs!An environment of uncertainty has been created worldwide due to the pandemic and the Russian-Ukraine war. Due to historical inflation and high unemployment rates, most major economies, including the US and Europe, have failed to reconcile economically. Still, the US Dollar’s hegemony has persisted despite this global crisis.
The seed for the dollar’s hegemony was sown soon after World War II in 1944 during the Bretton Woods Agreement in New Hampshire – USA, where 730 delegates from 44 allied nations agreed to the US Dollar as the global currency. Changing the gold standard paved the way to establish the United States of America as the most powerful nation in the world economy.America was a true winner in the conference as the rest of the countries linked their currencies to the dollar, while the dollar was linked to the price of gold. Since the US holds about three-quarters of the world’s gold supply, over time, the dollar’s value against other currencies has appreciated, and the dollar’s dominance over the rest of the economies has strengthened the US currency.
In 1971, the US officially abolished the Bretton Woods system by ending the dollar’s convertibility into gold. Still, the dominance of the dollar had, by now, been established, and the US utilized this power to dominate the world.For the past eight years, the Indian economy has performed well, evidenced by India’s current account deficit, which is the difference between the inflow and outflow of foreign exchange. From a record high of 4.7% in 2012-13 to 1.5% of GDP by the end of FY 2021-22. Also, India’s share in global GDP has jumped from 10th position to 5th position in the same period. The percentage of our country in global FDI inflows increased from 2.1% (2014) to 6.7% (2021).The US is the largest economy in the world, giving the dollar more strength and stability against other foreign currencies. About 60% of the international currency reserves kept with the central banks of different countries of the world are in dollars. The loans taken by the countries are also mostly transacted in dollars. It is also the primary currency used to exchange money in international trade. For example, the United States has an agreement with Saudi Arabia to transact oil trade with any country only in dollars. For this reason, India also requires dollars to buy crude oil. The immediate reason for the economic reforms of the 90s was also that India had only a few days of foreign exchange reserves(dollars) left to buy crude oil.
The dollar’s share as an invoicing currency is 3.1 times its share in world exports. Many non-US exporters invoice their exports in dollars. For example, only 40% of exports in the case of Japan and 51% in the case of the UK are invoiced in their currency. The real exception here is the US, whose 93% of imports and 97% of exports are invoiced in its currency, the dollar.
Since the economic reforms of the nineties, India has implemented a “Managed Floating Rate System” to determine the exchange rate of its currency. Since then, the exchange rate of the Rupee against other currencies has been based on market-based demand-supply. There is not much interference from the country’s government over the factors on which the exchange rate is determined.
It balances all the factors like import and export, inflation, lending rate, foreign exchange reserves, current account deficit, and international agreements. Rupee to dollar vis-a-vis circumstances beyond self-control, like post covid and the Russia-Ukraine war, depreciation in Rupee should not be considered permanent. As these uncertain conditions normalize, the Rupee will reach its average level.
Should understand the statement of Finance Minister Nirmala Sitharaman in two parts. First, the dollar is strengthening is not due to the lack of policies in the Indian economy, nor does India have any unique control over those conditions.
Second, due to the current international developments, the US is being trusted by investors to park their funds. Instead of being disappointed that the world’s largest economic superpower is being prioritized for investment in times of uncertainty, we should be encouraged to see that, among other developed nations, we are in a much better position. The Rupee remains the flag bearer of India’s strong economy even in these adverse times.