Thursday, 22 December 2011

Robust Rupee's Rapid Rumple

[And the Rupee had a great fall!]
The Indian economy, one of the fastest growing economies in the world, growing at an average of approximately 8% for the past couple of years even while the most of the world was in the doldrums, was having a gala time. The economy never looked more promising, the markets booming and lucrative and the currency had been doing well. In 2008 when the Rupee touched 39.30 to 1 US Dollar, it's highest in nearly a decade for most of which it was in the range of 45, people panicked for the rise had been sudden. However, I could not contain my joy, for despite having no direct interest in the rise, except maybe cheaper vacations abroad, it signified a robust economy and made my country look good. Nothing mattered more, not the losing exporters, not the perceived reduction in number of tourists, nothing. At that point in time, no one in their wildest dreams could have imagined Indian Rupee would fall from its perch. The Indian tiger, which was on the prowl and roaring, was now gagged.

Recently, when it depreciated to its all time low against the Dollar, a lowly 54.20 - a depreciation of nearly 15% since the start of 2011, it sent shock waves across the economy. The Rupee had weakened vis-à-vis all major currencies. I could now understand how the Japanese feel about their Yen or the Italians did about their Lire. The Rupee's slide, seemed like a foregone conclusion, but it's magnitude was definitely not foreseen. It was mainly caused by the huge capital outflows, steep fall in stocks and huge Dollar demands by the importers. If it was panic earlier, it was now pandaemonium! The fall in the Rupee was not just one isolated event. It's ripples crippled everyone. One of those many times I wish fantasy fiction comes alive was now, when I wanted nothing more than to bellow like Dumbledore does in the third Harry Potter movie, "Arresto Momentum" and halt the Rupee's rapid fall.

The Rupee's downfall may have brought a weary smile on the faces of exporters, for now they would earn that little extra as Indian goods and services become cheaper. However, for a majority of the public, it was nothing but grim news. The Rupee's fall pervaded all sections of the economy and everyday life as we knew it. Imports instantly became so much more expensive. India, a major importer of oil to satiate the fuel and electricity needs of a massive population, had to shell out much more to buy the same barrel of oil it did, until just recently. Petrol prices shot up and there have been 5 increments since last year; the price seems to have almost doubled since then. This led to declining foreign exchange reserves with the Reserve Bank of India and other banking and financial institutions and a widening Balance of Payment gap. The ever-widening chasm between imports and exports further worsened. The markets took a turn for the worse and stocks plummeted, deterring investment as they now were more speculative than ever. Inflation, largely due to the zooming oil prices, seemed to be out of control. The hole it burns in people's pockets, grows so wide, it resembled a crater; and there is always that dear petrol to prevent the fire from being put out, until it consumes the very thing it feeds on. What a traitor!

Consumer durables - electronics, especially mobiles, computers and televisions, becomes dearer. So does foreign travel. Travel agents and tour operators reported a sharp drop in reservations and a huge number of cancellations as the otherwise flamboyant, foolhardy and flashy Indian tourist now had to think twice before 'dropping dead till they shop', lest they end up omitting the last 3 words! However, on the bright side, travel to India would become a lot cheaper and inviting, resulting in a higher influx of tourists to the world's number 5 most preferred tourist destination. And with them comes some promise of revenue generation.

The Reserve Bank of India has unleashed a slew of measure to end the speculation on the Rupee and check its slide. These measures, sans the use foreign exchange reserves, is the first time since the 1997 Asian crisis that the RBI has gotten involved on such a scale. The measure include warnings and instructions to banks and other financial institutions not to short currency, reduced net overnight position, reducing the hedging limits, preventing Foreign Institutional Investors and corporates from betting on the dollar through forward contracts and a host of other measures, all intended to arrest the fall of the Rupee over the next month and try to find some sanity in the chaos. One can only hope and pray that over the next few months, the Rupee appreciates against all major global currencies and reclaims its past highs. We do not want a 'Dull Rupee' to go with 'India Shining'. What can we do? Reduce your petrol consumption and take the bus/train, sell all Dollars you have (if not to help the Rupee, then to get the most out of that Dollar, for the Rupee shall get stronger), invest in the markets a bit and do all you can to instil a feeling of optimism all round. Your actions may have no impact on the economy, but it does on your psychology and nothing's better than a little feel good during the slump.

[This post came after a looong time! I was just so busy with weddings and dinners and luncheons all through December that there never seemed ample time to draft one. Decembers and weddings, phew!]