Why is India’s Rupee continuing to fall?

The rupee, which has fallen for six straight months in the longest stretch since 2002, is seen sliding to Rs. 75 per dollar by year-end, according to median of 10 analysts surveyed by Bloomberg.

The worst run of rupee losses in 16 years is set to extend. Only this time, the declines might not be triggered by oil but by the surprise move by India’s central bank to hold rates despite the currency’s free fall.

At present, the value of India’s currency “rupee” is continuously falling and its value has declined by 12% between January – September 2018. Among the BRICS nations; after the Russian Ruble, the Indian rupee depreciated the most in this period.

Reserve Bank of India governor Urjit Patel’s comments that the rupee’s drop is moderate in comparison to emerging market peers and that the central bank doesn’t have any target in mind unnerved investors who were expecting the authority to boost its defense of Asia’s worst-performing major currency.

“Governor Patel has effectively left the rupee out in the cold and insinuated that it is not his job to determine the appropriate level for the currency,” said Charlie Lay, an analyst at Commerzbank AG in Singapore. “RBI has seemingly opened the floodgates for further rupee weakness.”

The rupee fell past the 74 to a dollar mark for the first time soon after the RBI’s decision, and analysts, whose year-end estimates have been obliterated by the meltdown, cut their targets further. Skandinaviska Enskilda Banken AB said the rupee could test 75 in the near term while ING Bank NV said the bank’s recent downgrade to 75 wasn’t enough.

To be sure, the RBI has for long maintained that it steps in only to curb undue volatility and doesn’t target any currency level. That stance places the authority behind counterparts in Indonesia and the Philippines, which have been actively supporting their currencies, Madhavi Arora, an economist at Edelweiss Securities Ltd., wrote last month. “We expect the weakness to persist, with the rupee heading toward 75-plus levels against the dollar, unless some additional assertive policy steps come through,” she said.

Devaluation Meaning:  When the external value of the domestic currency depreciates while the internal value remains the same, such situation is known as the devaluation of the domestic currency.

The basic difference between the devaluation and depreciation is that, the devaluation is done by the government of the country deliberately while the depreciation take place because of market forces i.e. demand and supply.

At the time of independence; India adopted the Par Value System of International Monetary Fund (IMF). On the August 15, 1947; the exchange rate between the Indian rupee and US Dollar was 1USD = 1 INR. Indeed, in 1948, you would have been able to buy a US Dollar for less than Rs. 4. but in the past 71 years, it has seen an over 21-fold depreciation.

At the time of Independence in 1947, there were no foreign borrowings on India’s balance sheet. To finance welfare and development activities, especially with the introduction of the Five-Year Plan in 1951, the government started external borrowings. Back then the rupee was still pegged to the pound, so when the latter lost ground, so did the local currency. “Consequent to the devaluation of Pound Sterling, Rupee was automatically devalued to the same extent (as the Pound Sterling) on 18 September 1949,” the RBI stated.

Over the next 25 years, the rupee continued to slowly depreciate against the dollar – its link to the pound sterling was severed in 1971 and it was directly linked to the dollar. This was on account of a host of factors such as political instability, lack of robust growth of the Indian economy held back by numerous scams and global factors like the 1973 Arab oil embargo, which widened India’s trade deficit. And a high deficit means the country has to sell rupees and buy dollars to pay its bills, which further reduces the value of the rupee. In the bargain, the rupee sank to a fresh low of Rs 12.34 to a dollar in 1985, and was barrelling towards its third devaluation.

The rupee touched a high of Rs 39 to the dollar in 2007 but the global economic crisis of 2008 put a stop to the rally. By end 2008, the currency had hit a fresh low of Rs 51. Then, in 2012, the government’s budget conditions worsened due to spill-over effects of the Greece-Spain sovereign debt crisis, and the rupee fell further to Rs 56.

Factors ranging from volatile oil prices to vacillating foreign inflows, from global economic concerns to domestic issues like rising inflation have continuously rained on the rupee’s parade ever since.

 When the Modi led BJP government came to power in May 2014, the exchange rate stood at 58.66. In simpler words, 1 Dollar= Rs. 58.66. in less than five years, however, the Rupee has undergone continuous changes, with the latest one being the all time low value of Rs. 74.07 (as on October 5th, 2018), although bouncing back to Rs. 70 in November end, 2018.