The Indian Rupee has been losing value against the American Dollar. Earlier this week, the Dollar crossed the Rs 83 level.
This got the Opposition all excited. The newly-elected Congress president Mallikarjun Kharge tweeted in Hindi: “girta rupya hamari economy ke liye kaafi khatarnak sabit ho sakta hai (A falling Rupee can prove to be quite dangerous for our economy).”
Of course, those in government have been offering what they think are reasonable explanations on why the Rupee is losing value for a while now.
One claim that has proved to be quite popular on ‘WhatsApp University’ is that the Rupee has lost the least value against the Dollar, in comparison to other currencies. This isn’t correct. As of closing on October 20, $1 was worth around Rs 83. In comparison, $1 was worth Rs 74.4 on December 31 last year. Between then and October 20, the Rupee has fallen 11.6% against the Dollar.
In comparison, the Indonesian Rupiah has lost around 9.3% against the Dollar in the same period. The Peruvian Sol has barely moved against the Dollar. On the other hand, currencies like the Mexican Peso and the Brazilian Real have appreciated against the Dollar by 1.6% and 5.4%, respectively.
Of course, there are other currencies like the Thai Baht and the Philippine Peso that have lost close to 15% against the Dollar, which is greater than the value lost by the Indian Rupee. So, the truth is somewhere between “highest” loss and “least” loss against the Dollar, and it is certainly not what is being bandied around on WhatsApp University.
Let’s now look at the currencies of the developed world. Between the end of December and October 20, the Euro has lost around 16% against the Dollar. The British Pound has lost around 17%. Clearly, the Rupee has done better than them. Nonetheless, one needs to understand that countries in Europe are facing the negative economic impact of the war in Ukraine much more than countries in other parts of the world.
The second explanation offered by politicians in power has been that while the Rupee has lost value against the Dollar, it has risen against other currencies like the Euro, the British Pound and the Japanese Yen. This is true. But it is important to understand that around 86% of India’s exports and imports are invoiced in dollars. This is because the American Dollar is at the heart of the global financial system. This makes the Dollar-Rupee rate of practical interest. In the case of other currencies, the value largely matters only to students and tourists looking to study or holiday in these countries.
Also, while the Rupee has gained against the Euro, the Pound and the Yen since December, over the long term, it has lost value against these currencies, too. And this is hardly surprising given that the rate of inflation in India over the years has been much higher than in these countries.
The third and the most recent explanation offered by those in power, and a few experts as well, is that the Rupee is not losing value, but the Dollar is gaining instead. This is another way of saying that the world is going through an economic turmoil and hence, money is moving from different parts of the world to the United States, because the US Dollar is deemed to be the safest financial asset in the world. This is correct, but in practical terms it is only a matter of semantics. The Dollar-Rupee rate is ultimately a price, and one cannot gain value without the other losing. So, whether the Rupee falls or the Dollar rises, either way it only means that we need more Rupees to buy a Dollar than before.
The unhealthy obsession with the Dollar-Rupee conversion rate started a decade back when claims were made that if Narendra Modi came to power, a Dollar would be worth only Rs 40. It is wrong to always associate the strength of an economy with the strength of its currency. The history of economic development is replete with examples of less-developed countries exporting their way to prosperity, thanks to their weaker currencies that helped boost their exports.
Of course, on the flip side, given that India imports more than 85% of the oil it consumes, a weaker Rupee makes petrol, diesel, kerosene and domestic cooking gas expensive, and that feeds into inflation.
That’s the thing with economics: There are no free lunches, but that doesn’t mean that we should obsess with a stronger Rupee to the extent that we currently do.