Krishna R A
The Great Indian Rupee Trick
This article originally appeared in CRI content has now been subsumed in The views expressed here are personal and do not necessarily reflect those of the editors of

This piece is not about how the economy is tanking. That is a known phenomenon, and I wrote about it in my previous piece here . Well that was around 8 months back. There was no doubt in my mind that the economy was in serious danger, and the US Marines were unfortunately not there to come to the rescue, unlike the themes of several movies seen by me in my formative years.

Here,this is about how our currency, the Indian Rupee is just poised on quicksand and all the inflation that we have been tolerating so far is very likely to come back to bite us right on our collective backsides.


In Jan 2000, the CPI was around the 90 mark, and in Jan 2004 it rose to 104. . However, the rate rose sharply from 2008 onwards and went from around 125 straight to 220 in all of the 5 years.

Here’s one more statistic showing how our external trade position has fared.


Just below zero in 2004 and then it started getting more and more adverse. We are now having a trade deficit of close to 1000 Billion rupees or in USD as on date; it is around USD 18.62 Billion. Please note the sources from where these stats have been taken, before you accuse this Jan Sanghi of fudging statistics to show the government in bad light.

Let us see how exports have fared

Not bad one would say till you see this one: –

And this has got progressively worse in 2013. No matter what you are told about easing in percentage of CAD to GDP, there is merit in believing the worst.

Why oh why is the Rupee seeing its worst days against the US dollar? The answer lies in two factors that you need to see, one is the relative rates of inflation, which determines rates over a longer time horizon and the other is supply and demand in the market for dollars. As you will see in this piece written at the time of Budget 2013-14, we are dependent on foreign inflows in the form of FII and FDI to keep the rupee afloat.

All very well, except that there seems to be no reason for the world to support the INR. So when the collective thought of investors is to seek alternative avenues for investment rather than India, as they did by exiting government securities and the stock markets, to a lesser extent, the Rupee just tanked shocking everyone. Shocking, hardly I would say. We should have seen this coming. A house built on a sandy foundation with no support will collapse. One cannot ignore economics entirely and expect that there will be no consequences.

One of my Gurus, Mr A.V.Rajwade made this perspicacious observation here in May this year: –

“AV Rajwade: Again I am taking a longer view and yes I think that our belief that we are an exception to every rule is a wrong belief. We cannot keep on living on others’ money forever. Nobody can, nobody has. Nobody has ever grown fast based on capital inflows. These are facts, and I do not believe that we are an exception to this basic rule what we have seen in the last 70 odd years in the global economy.

The question is what kind of the time horizon money is looking up? As I said our current account deficit is horrendous, there are few signs that there is going to be a significant improvement. Trade number for April was bad, and that is likely to persist, iron ore exports have gone down, coal imports will go up. I would believe that in the medium term the rupee’s fate is going to be decided far more by the competitiveness of our tradable sector, not on what happens to the dollar index or what happens to the dollar yen rate or whether there is a risk on or risk off and so on so forth. Those are essentially for traders, and I am not a trader in currencies.”

The markets react on a short term basis but eventually settle into sanity once the exuberance is over. This will happen soon.

The Rupee’s fate is only a symptom and not the cause. It has tanked only because of the mismanagement of the economy by the UPA, mainly the Congress. Our exports need to go up substantially, and the imports need to be brought down so that we can see a strengthening of the rupee organically. The paradox is that thanks to the mismanagement of the economy, the Rupee should be around Rs 75 to the dollar, based on relative inflation of the USA and India.

Our exporters are a resilient lot and will settle for sales proceeds at Rs 60+ to the USD, and we can see some short term increase in exports with a slight lag. On the imports side, there is a need to identify what we don’t really need and stop these imports. Is there any reason for us to import apples and oranges? Or soft toys? We must ruthlessly stop nonsensical exports and see how to improve supplies from within.

It’s a pity that the UPA has, for short term electoral gains, reduced our people to a set of wimpy freebooters. Hopefully we will see a new dawn soon and find India on the path to greatness. But that seems to be at least a year away and the path thereafter will include tough and politically unpopular decisions. Well, I can dream!

Coming back to the Rupee, I am of the strong opinion that we will see a big depreciation once again because our economy, at least on the forex side, is floating on a sea of hot money that will just flow away. How much of our reserves are real and durable reserves of a medium to long term nature, and how much is made up of volatile flows is not clear. Our people have lost faith in the government and banks, and are moving away from deposits as their mainstay. While Gold has stayed down, it will not be long before it starts rising encore. Wait till Deepavali for that.

Also,when people lose faith in the economy they gravitate towards gold. There are some people like me who have only a limited happiness in seeing the dollar rise. I am well aware that purely, in a selfish way, it is nice to get that much more for each Dollar or dirham I remit. Overall, however, I would prefer to see a situation where the Rupee starts appreciating once again on the back of good export performance and the government is able to trim down imports.

Finally, here is why I believe that the Rupee will tank further and stay low for a long time:

  1. No Foreign Direct Investment is coming, regardless of the noise made by the main stream media and the dishonest government.
  2. The trade deficit shows no sign of decreasing as the imports exceed exports by a good USD 20 billion or so every month
  3. Oil has just touched 100 and will only increase as winter sets in and demand increases. So unless, the oil companies have booked forward at a good price, we have to deal with the reality of higher oil prices
  4. Sooner rather than later, the India story will wither away, thanks to high fiscal and CAD and plain mismanagement and scams, and it will be very difficult to resurrect it. The consequence would be a flight of capital with a deleterious effect on the rupee

Well, the people have voted for a ‘subsidized’ life with Bharat Nirman and Food Security Bill and NREGA. The results are there for all to see. Where are we headed? To a hellish life made more hellish by runaway inflation, a rupee tanking and looming food shortages as farmers find no labour to help in sowing and harvesting their crops and a whole generation bred on freebies.

We have one hope, and he will come in on the back of huge expectations. If we have UPA3, kiss the idea of India Good Bye!