Sliding rupee: How much lower can it sink?
The rupee could continue depreciating vis-Ã -vis the dollar, mainly on account of the renaissance of the US economy.
July 08, 2013 / 13:27 IST
Munesh Khanna
The rupee has now breached the 61 mark. How much further can it sink ? Is it temporary ? Caused by the FII's pulling money out of the Indian economy or caused by the flight of capital to Gold imports by Indians or as a result of the current movements in the foreign debt bond market?Alternatively is it something more permanent due to the overhang of the Indian foreign debt , the dependence on energy imports or is it because based on historical inflation in India compared to the US, the rupee is actually still overvalued by 12-17% as is the case made by some economists. Most of our debate and discussions have been based on the above arguments, looking naturally as we would , internally and considering a limited view and perspective. However, to a large extent the discussions have ignored the fact that the rupee could continue depreciating vis a vis the dollar, mainly on account of the renaissance of the US economy. In the winter of 2008 post the financial crisis , the US economy was , at worst written off or at best summed up as being in a permanent state of decline . The same economy has shown a remarkable resilience . A combination of factors both fortuitous and planned has seen a resurgence of the economy in a very short span of time. Statistically, the US has added half a million new jobs and finally house prices has risen after a 3-4 year hiatus. Additionally the US manufacturing productivity index has steadily improved making it one of the most productive and competitive manufacturing bases in the world. As a result new manufacturing facilities are coming up which will enhance the productivity and employment further Foresight coupled with swift action by the US policy makers ensured a speedy recovery. Government bailout for the banks which was crtizied both within the US and outside resulted in a USD 25 billion for the Government and a banking industry which is much stronger than its European counterpart . Similarly the decisive quantitive easing program, increased liquidity in the markets , maintained low interest rates , increased corporate profits buoyed a rising capital market restoring and creating additional wealth for the US investors. In addition to the measures taken by the US Government, providence played its own part. The US shale oil and gas fracking assets will ensure that within the next 15-20 years US achieves it goal of energy self reliance. The fact that US will not depend on oil reports and will produce energy at a much cheaper cost will in turn boost productivity and the economy further. Granted all these factors may not result in the US achieving the pinnacle of influence in the world economy that that it had in 2008 , it however still remains the most robust economy and a force to reckon with . This is compounded by the faltering of its challengers. China which was a juggernaught has lost its steam with the slowing down of its economy , mismatched demand and supply and a growing foreign debt.Russia and Brazil which had become very strong economies on the back of rising natural resources prices are also staggering with prices of natural resources under pressure due to slackening world demand . Our very own Indian economy has merely flattered to deceive and is certainly no challenger. These factors will ensure that the USD, which is not only a barometer of the US economy, but is also the reserve world currency will continue to get stronger and that would be the primary reason why the Indian rupee may continue to show weakness against the dollar. The author is senior partner at Grant Thornton in India, an assurance, tax and advisory firm
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