There is truly no mystery or magic formula about the value of any sovereign currency such as the dollar, pound, yuan, rupee etc. It is the inherent economic strengths of a country that largely determine the value of its currency in the long run. It also determines its comparative valuation, such as the rupee against the dollar, euro etc. These strengths are reflected in the macroeconomic parameters of a nation, viz inflation, interest rates, GDP growth, balance of payments, forex reserves, economic reforms and the flow of foreign investment. India at the moment, has been strong on most of its macro economic parameters, as reflected in its GDP growth at 8.2%, the fastest in the world, inflation at a moderate rate of 5%, a rising flow of FDI, a burgeoning fiscal deficit, but in control and forex reserves of about USD 400 bn. India’s macros as compared with its peers are sound and do not really justify the sharp fall in the rupee value that we have been witnessing of late. The rupee has fallen to over Rs.72 to a dollar of late and if the recent GR of the Maharashtra Government is to be believed, it will touch Rs.80 by the year-end.
The present fall in the rupee value has thus largely been due to external international factors and not due to domestic ones. A strong dollar has been attracting global capital inflows, resulting in a flight of funds from currencies like the Indian rupee. So while the dollar has been sucking in the world’s wealth and has been depreciating other currencies, the fall therein is being aggravated by the US-China tariff wars, the fresh sanctions on Iran and the rising oil prices. It is the dollar which is clearly overvalued today and is hurting the American trade interest. With Amercian exports becoming uncompetitive in global markets, the dollar value needs to be rectified and be reset, which looks imminent in the coming months. That will also bring normalcy to the value of the Indian rupee, which seems to be almost in a free fall at the moment.
Though the continued surge in the dollar value has not yet triggered the panic buttons, the government is rightly worried about the growing current account deficit, primarily due to the rise in global oil prices and the unremitting rise in oil imports by India. Though the CAD has been in good control during the last few years, primarily due to subdued oil prices, it has now been on a consistent rise and is expected to cross a worrisome 2.5% of GDP this year.
In order to arrest the growing CAD, the government has announced a slew of measures that include liberalizing the external commercial borrowings, removing TDS on masala bonds to make them attractive, removing the compulsion to hedge forex infra loans and identifying items whose exports can be encouraged and incentivized. These are cosmetic changes but can have a favourable impact of up to USD 10bn on our CAD. In case the oil prices and the dollar do not ebb and come down, the government is bound to announce a liberal NRI bonds issue, to send a signal of confidence and strengthen the rupee, apart from shoring up the forex reserves.