Up up goes the American dollar and down down goes all other currencies! A nation’s currency is a strong national identity, ask the British who said no to Euro, and fluctuation in its value captures public imagination and political attention, although many may not understand the economics of it .
The rupee downward slide over years has been a point of discussion and debate but not of concern as it did not pose a grave threat. The fall in rupee value from Rs. 74.56 per dollar in January 2022 to Rs. 77.43 per dollar on 13th May 2022, which accounts for 3.84% depreciation in rupee value seems to have got the media and public attention. Political blame game out there seems to have overlooked the ground reality that rupee slide is a reflection of the coupling of economies in the integrated global order. Currencies across the world have seen large erosion in their value.
Pandemic did make the policy makers opt for inward looking policies but the Ukraine war highlights the fact that world economy today in highly integrated and interdependent. Rising oil and commodity prices, particularly wheat, has strained import bills worldwide. India the third largest consumer and importer of oil has seen a doubling of oil bill from $ 62.2 billion( 2020-21) to $ 119.2 billion ( 2021-22). The upward movement of the interest rates in US market, which is seeing its worst inflation, has led to flight of financial institutions from emerging economies triggering a sharp outflow of dollar. Indian markets have seen a withdrawal of Rs. 1.5 lakh crores by foreign investors just in 2022. This demand-supply imbalance is the prime reason for the downfall of rupee.
Economic uncertainty across the world has made dollar the most favored asset to hold today. Hence the coming days will see further strengthening of the dollar, which will cause greater economic stress among economies. The slide will push fuel and commodity prices and cause a hole in our pockets. Any intervention of the RBI to check the rupee slide will only erode the forex reserve and not provide any lasting solution. We need to accept the reality that rupee will slide further and policy approach should focus on how to minimize its adverse impact. The falling rupee does make exports competitive and we must capitalize on it. There is also a need to curb non-essential imports. It is also time to review the fuel taxes as any further rise in fuel prices would build up the inflationary pressures.