© Reuters. The Indian rupee enters 2022 at one of its worst moments
Hugo Barcia
New Delhi, Jan 6 (.) .- The Indian rupee enters with fragility in 2022, since after almost four uninterrupted years of depreciation the currency of the sixth largest economy in the world is in one of its worst moments, dragged by the deterioration of its indicators and the flight of foreign funds in the market that begins to see the situation in the country with caution.
Since one dollar was equivalent to 63.85 rupees on January 1, 2018, the Indian currency did not stop devaluing until this Thursday, when it takes 74.44 rupees to equal one unit of the US currency, which represents a reduction of more than 16.5% in value.
This brings it closer to the all-time low of 76.9 reached in April of last year.
Broadening the perspective, this depreciation has been widespread in the last decade, which has seen the currency devalue 64% since January 2011, when a dollar was exchanged for 45.40 rupees.
So, with business activities seriously disrupted by pandemic restrictions, and the accommodative policies of the Reserve Bank of India (RBI), the rupee’s appeal is dissolving.
IMPORTS AND LOW INTEREST RATES
According to the Indian economist Santosh Mehrotra, there are different reasons that explain the loss of value of the rupee in recent years, and one of them is the increase in the prices of Indian imports, and especially that of crude oil.
“Oil prices have been increasing (…) the demand for Indian oil has grown and therefore its demand for dollars has increased,” causing a devaluation of the rupee, Mehrotra explained to Efe.
Another of the arguments put forward by the expert to justify the fall in the currency was the low interest rates in the Asian country, which are currently at “historical minimum levels” and “are not attractive” for foreign investors.
And it is that lower interest rates offer a lower return for foreigners, so they reduce their demand for Indian currency in the foreign exchange market, and lead to a loss of its value.
Mehrotra blames the Reserve Bank of India for this, especially for the “extremely accommodative” approach it took to recovering the economy after COVID, relying too heavily on monetary stimulus, rather than fiscal policies.
Since the beginning of the pandemic, the RBI has been lowering the rate from 6.5% to 4%, a record low, to support long-term growth and mitigate the impact of covid-19 on the economy .
But for Mehrotra what is necessary is “a stimulus to fiscal policy, putting money in the hands of the people,” he said.
In addition, the expert also regretted that the uncertainty generated by the coronavirus has caused “the return of dollars to the United States, in search of financial security”, also reducing the demand for rupees abroad.
INCREASE IN THE COST OF LIVING
These factors translate into an increase in the prices of imported products as well as an increase in domestic demand, favoring the high inflation that has characterized the Asian country in recent years, and increasingly deteriorating the life of society.
“Citizens have been so hit by the government in recent years that for the vast majority of our population it is becoming more and more a question of survival,” the analyst explained.
The same, Mehrotra stressed, is what has already happened recently with basic products, such as food, whose price rose by 31% between July 2020 and July 2021 according to the RBI, or fuel, which the Government charged with more taxation.
“Everything I suggest points in the direction that the rupee is going to continue to depreciate,” concluded the economist, who doubts “that inflation will be controlled soon.”
BALANCE THE .ERCIAL BALANCE
The devaluation of the rupee, however, has a positive side, as it favors India in the value of exports, offering a better boost to the recovery that the reopening of its economy implies.
This was stated by Anil Bhansali, supervisor of the Treasury and foreign exchange consultancy Finrex, based in Mumbai, who added that the situation of that balance worsened much in the last year, reaching a deficit of 22,000 million dollars in December. , a historical record in that month.
“About a year ago, that trade deficit was between 9,000 and 13,000 million dollars,” said the economist.
But Bhansali stressed that the depreciation of the rupee is not enough to solve this problem, but it is also necessary to “increase manufacturing in the country and increase the quality of exports.”
“We should have increased our manufacturing capacity much earlier, but we could not do it and we allowed the East Asian countries and China to export much more,” he lamented.
(Photo / Video)