Politics 29 August 2013 Can we stop the descent of the rupee? No convincing plan as yet. Print HTML The rupee is in trouble. Though its strength has mildly improved today (67.37 against the US dollar today from 68.4 on Wednesday evening) it is now one of the worst performing currencies among developing countries. Not long before, as Deutsche Bank recently predicted, the rupee touches 70 against the dollar. Does not seem long at all. The Indian stock market has tanked. The financial markets seem to have gone into panic mode. Foreign investors have already sold almost $1 billion of Indian shares in the eight sessions through Tuesday and now Syria, with its increasing crude oil prices and the growing fear of a possible US-led military strike against it, has spooked investors further into believing that India’s already large current account deficit (CAD) may be escalating. As global prices of India’s two biggest exports – gold alongside oil - surge this week, the strong demand for the dollar from banks and importers, mainly oil refiners, is putting additional strains on the rupee. The US Fed policy, Ben Bernanke’s plans to start quantitative easing by end-2013 and the West in general coming out of recession have definitely hit all emerging markets hard. Ahead of the Fed’s anticipated tightening, currencies in not only India, but also Indonesia and Brazil, among others, have dropped. It is expected that when the tapering begins, developed market stocks, bonds and currencies will be most preferred. According to Kevin Gardiner, CIO Europe, Barclays, a world in which monetary policy is normalising, decade-long flow of funds out of developed and into emerging markets slows and even reverses for a while. But the rupees plight today cannot be blamed just on external factors. There are more home-grown reasons as to why, among risky emerging markets, India is being viewed as the riskiest. In India, the high CAD is a massive problem. Foreign provisional investments are used to fill the massive CAD, but that’s not a real solution. There is also a huge imbalance between the imports and exports – the former having risen substantially, widening the CAD further. The rising import bill (arising out of gold, which contributes to over 10 per cent of the total bill) has not helped either. Also, India’s economic boom has been of a peculiar, even lopsided kind. When the money was flowing in, the country’s progress actually deepened the gap between the rich and the poor. During its economic highs, the growth in the Indian market was largely sector and strata specific. It was the construction companies and the real estate sector, for instance, which truly profited. The IT sector grew exponentially too. But the general boom did not essentially create a larger, multi-tiered job market, to benefit the grass root level. The rise hasn’t been bottom-upwards. Being one of the poorest countries in the world, the problem is with the basics. Power supply issues, poor infrastructure, lack of education, land problems and just generally oppressive regulations are all keeping foreign investment out of the country. It is all contributing to the rupee’s decline. All this, alongside the huge social discrimination and disparities that are battled by citizens on a daily basis, bringing about further lag in general progress. There is also widespread corruption which is a key problem, unlike the developed world that hardly has lenience towards it. The Reserve Bank of India is trying to fill the gaps - true. To check the rupee's free fall, the RBI announced a special window "with immediate effect", late on Wednesday, to sell dollars through a designated bank to the three state-owned oil marketing companies – Indian Oil, Hindustan Petroleum, and Bharat Petroleum "until further notice". They need about USD 8.5bn monthly to meet daily foreign exchange requirement. The RBI previously opened such a window during the global financial crisis in 2008. The Indian government has also proposed setting up a task force to look into currency swap agreements. Several analysts believe this move could reduce market demand for dollars. Infrastructure projects worth $28.4bn have also been approved to try perking up the economy and currency. The RBI has imposed restrictions on the amount of money that companies and individuals can send out of the country too, as well as increased the duty on gold imports thrice this year. But the central bank has also been sending out mixed signals. After the rupee hit a low in July, the RBI had raised interest rates to tighten liquidity in the domestic market. That, however, didn’t help. This week, the RBI decided to get more cash into the economy by bringing interest rates down. Optimism around that didn’t last long in the markets either. Earlier in the week, BNP Paribas slashed its economic growth forecast for India, for the fiscal year to March 2014, to 3.7 per cent from its previous 5.2 per cent. Reuters quoted BNP Paribas saying India's parliament "remains toxically dysfunctional". BNP also said with general election in 2014 looming near, "the government's willingness to instigate a politically unpopular fiscal tightening is close to nil." It is true that the upcoming general elections are definitely another factor turning the rupee-recovery pools muggy. But one would like to believe that effective medium to short-term plans will be adopted fast, instead of constant ad hoc measures, for any actual progress to come about. Ideally, in the long term the problems will be tackled at the economic and societal foundations – no permanent recovery can be expected otherwise. For now, though, the RBI and the government are, clearly, yet to unveil steps that can convince everyone that the rupee can even be stabilised. › Life under Pinochet: “We still don’t know what happened to my brother” The rupee is in trouble. Photograph: Getty Images Meghna Mukerjee is a reporter at Retail Banker International Subscribe More Related articles We are heading for the next recession – it's crucial the right people are in charge Five years of profitable themes and stocks… Chinese loan sharks are using nudes as collateral. Is this the grim future of revenge porn?