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The rupee’s downslide has been making news over the past fortnight, with the rupee exhibiting a steady decline against the dollar and crossing the 60/dollar level. For those who’ve been off the radar: What really triggered the rupee’s fall?
The weakening of the rupee was set off due to the accelerating demand for the US currency, as most of the international trading in commodities is done using the US dollar. Moreover, the liquidity and credit crunch in the US also created panic and uneasiness among investors.
Plunging stock markets coupled with the debt-ridden Euro Zone added to the mayhem.
What started out as a monetary policy for the US to revive its grim economy after the recession, has now become responsible for a major furore. This monetary policy has kept short-term interest rates in the US at extremely low levels. Given the current economic situation, it was always clear that other economies would be drawn into the whirlpool.
On June 19, the US’ Federal Reserve Chairman Ben Bernanke spoke of a likely withdrawal of the Quantitative Easing policy, which helped infuse a pre-determined amount of money into the economy. With this stimulus on the verge of being called off, the investments generated through foreign investors shifted back to the US and sent Indian stocks spiralling downward.
The Indian currency has declined by more than 3 per cent since the announcement by the Federal Reserve. A weaker rupee can lead to inflation, augment fiscal deficit and has the possibility of slowing down capital inflows. With India running on a large amount of trade deficit, it is in constant need of an inflow of dollars – and this is not forthcoming.
This rapid depreciation of the rupee also affects businesses by bringing in uncertainty and worries about a possible financial crisis.
What’s more, with the rupee having hit its all-time low at 61.19, the common man struggles to make ends meet with the prices of all essential commodities shooting up.
With the rupee going downhill, the Government could rein in foreign investors to directly invest in equity capital in the country, to hike up the economy and provide for greater inflows.
(Sneha is a student of Economics at Stella Maris College, Chennai.)
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