The inherent strength of any country is shown by the value of its currency. If its currency is stronger than other currencies, the country is considered strong. The US dollar enjoys the status of a global currency, which is why the value of the rupee against the dollar shows whether the Indian currency is strong or weak.
The rupee hit a record low against the dollar on May 9 and was trading at Rs. 77.28 per dollar. The rupee has been staggering since the beginning of the year. This is the biggest fall ever seen in the rupee, and now the rupee has come to its all-time low level.
Since Independence, the rupee has depreciated almost 20 times. In 1948, $1 was available for Rs. 4. There was no debt on the country then; the government started taking loans from abroad when the first five-year plan was implemented in 1951, and then the value of rupee also started decreasing continuously.
When the rupee becomes cheaper against the dollar, it directly affects the economy. Rising prices could accelerate inflation, which is already high. In such a situation, the value of the rupee will affecte the life of the common man, the businessman, and the government, too.
Declining global activity, investors’ decision to invest in safer global markets, along with rising tensions in global politics are one of the main reasons behind the fall of the rupee. The value of rupee depends entirely on its demand and supply. Imports and exports also have a direct effect on it.
A country that imports more than its exports also has a higher demand for dollars, and India imports more than it exports. India is one of the major importers of crude oil, and imports about 80 per cent of the oil. Undoubtedly the rising crude oil prices in the international market are among the main reasons for the fall in the value of the rupee.
Dollar outflows from the country have increased as foreign investors have cut down on investments. Now foreign investors are investing in more secure US dollars and bonds. This has reduced the supply of dollars. The country’s foreign exchange reserves are also depleting continuously; it has come down to below $600 billion for the first time this year.
Although the central government has assured to make every effort to stop the fall of the rupee, but now the government will have to take concrete and tough steps.
If the government tries to convert its economy, which is dependent on oil, then we can save a huge part of our foreign reserves, and for this, we should all consider the alternatives to oil. The government has to move strategically towards controlling imports and increasing exports. For this, an efficient business environment can be created by reforming the land and labour laws. According to a report by Grant Thornton, India has a vast field of opportunities in different regions of rural India.
Also, if we start using indigenous goods, then the cost of importing foreign goods will be saved. The government will also have to emphasise on increasing foreign direct investment (FDI). As the inflow of FDI increases, the value of the rupee will also increase. For India to become a $5 trillion economy by 2025, we need to export at least $2.5 trillion worth of goods and services, as exports currently account for about 25 per cent of our total GDP.
The author is associate professor, Jawaharlal Nehru University
(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)