Challenging Period For The Rupee

By Dr. Brajesh Kumar Tiwari

The trend of falling rupee is not showing any signs of stopping. On the 3rd day of new year 2025 the rupee reached an all-time low of Rs 85.78 against the dollar, which is the biggest fall in the last two years. The underlying strength of any country is shown by the value of its currency. If its currency is strong compared to other currencies, the country is considered strong.  On December 19, the rupee had crossed the level of Rs 85 for the first time. This is the seventh consecutive annual decline of the rupee against the dollar.

US dollar as King:

In this globalized world, the value of every country's currency against the US dollar not only impacts the economy of that country but also affects the prices of many things in the market. According to the International Standard Organization list, there are a total of 180 currencies around the world, but among them the American currency 'Dollar' has become a global currency. Today, the dollar is involved in 80 percent of the world's trade, which is why the value of the rupee against the dollar shows whether the Indian currency is strong or weak.

Rupee fallen almost 21 times:

The rupee has fallen almost 21 times since independence; in 1948, 1 dollar was equal to 4 rupees. At that time there was no debt in the country, then when the first five-year plan was implemented in 1951, the government started taking loans from foreign countries and then the value of rupee also started decreasing continuously.

Value of Rupee and its Impact on the Economy:

When the rupee becomes cheaper against the dollar, it has a direct impact on the economy. Falling value of rupee brings inflation, which is already high. According to NSO data, inflation in food items jumped to 9.24 percent in the month of September, which was 5.66 percent in the previous month in August and 6.62 percent in the same month a year ago. Inflation rate in rural areas increased from 4.16% in August to 5.87% in September. At the same time, in urban areas this rate increased from 3.14% in August to 5.05% in September.

Even if we do not take seriously the fall and rise of a few paise in the rupee, they have a big impact on our lives. The fall in rupee has a direct impact on the country's economy, due to which import of petroleum products will become expensive and freight transportation will become expensive. This will have a direct impact on the inflation of every essential item. There is a sudden increase in all loans taken in foreign currency and the interest paid on them. Studying abroad will also be expensive.

Key Reasons of degrading of Rupee:

The economy around the world has seen two major shocks of the COVID-19 pandemic and the Ukraine, Gaza conflict. India is also not untouched by this. Today, the condition of currencies in major markets around the world are weak. There are many domestic and global reasons behind the decline in rupee, ranging from trade imbalance and inflation rates to geopolitical tensions, decline in global activity, investors' decision to invest money in safe global markets and increasing tension in global politics and the US Federal Reserve's stance. Policies are responsible. The outflow of dollars from the country has increased due to cut in investment by foreign investors. Now foreign investors are investing in safer US dollars and bonds. Like any other business in life, the relative value of one currency against another depends on which one is in greater demand. Imports and exports also have a direct impact. A country that imports more than it exports has a higher demand for dollars. Like India imports more than it exports.

India is one of the major importers of crude oil and imports about 80 percent of the oil, India needs more dollars to pay for the oil, which increases the demand for dollars. High oil prices increase India's trade deficit, which weakens the rupee. Crude oil prices will increase rapidly in the coming days due to Iran-Israel war. Because Iran is one of the largest crude oil producers in the world, it can have a special impact on India, which imports 80 percent of the oil. Although earlier India used to buy crude oil from 27 countries, now the number of these countries has increased to 39. Historically, events such as production cuts by the Organization of Arab Petroleum Exporting Countries (OPEC) have forced India to borrow foreign currency to meet its oil needs.

Steps to protect value of the Rupee:

Although the Central Government has assured to make every possible effort to stop the fall of Rupee, but now the Government and the Reserve Bank will have to take concrete and strict steps. If the government tries to change its economy dependent on oil, then we can save a huge part of the foreign reserves and for this we all should consider alternatives to oil. The government will have to move strategically towards controlling imports and increasing exports. Also, tax exemption on hybrid and electric vehicles will have to be increased.

To stabilize the currency, India needs to focus on promoting exports and attracting foreign investment to offset the deficit. According to the International Labor Organization (ILO), India may face a shortage of about 29 million skilled workers by 2030. The government will have to move strategically towards controlling imports and increasing exports. This is the time to effectively implement the 'Make in India' program which even after nine years is far behind in its effective contribution. Despite being the fifth largest economy, India contributes barely 1.6% to world exports. A primary objective of the campaign was to increase the share of manufacturing sector in Indian GDP to 25 percent by 2022 although it has remained between 14 to 16 percent in the last 9 years. Considering the time, direct taxes and corporate taxes on high earners should be increased and inflation should be brought down by reducing indirect taxes. This will increase the demand in the market, stabilize the economy and the confidence of foreign investors will also increase. India's economy is agriculture-based economy, employment has to be created in rural economy also. According to a report by Grant Thornton, there is a huge pool of opportunities in different areas of rural India.

India will have to focus on internationalization of the rupee, this will also help in reducing the demand for the dollar and the Indian economy will be less affected by global monetary shocks. Internationalization of the rupee reduces the need to keep foreign exchange reserves. For the first time in 2023, India made payment in rupees to the United Arab Emirates (UAE) for the purchase of crude oil.

Also, if we start using indigenous goods then the cost of importing foreign goods will be saved. Foreign direct investment in Indian industries should be encouraged. The money that comes in the form of Foreign Direct Investment (FDI) comes in view of the long-term importance of the Indian market. As FDI inflows increase, the value of the rupee will improve.

(The author is Associate Professor at Atal School of Management (ABVSME), Jawaharlal Nehru University (JNU), New Delhi. He can be reached out at @bkt_brajesh. Views expressed are personal and do not reflect the official position or policy of Outlook Media Group and/or its employees. The article is for information purpose only; please consult your financial planner/s before investing.)