Rupee on historic low

Trump Corners India

By Shivaji Sarkar

The trade war, US warning against the deal with Iran, India’s move to WTO with Norway against high duties by Donald Trump on steel and aluminium and certain domestic macro-economic and political issues have taken a toll – on the rupee. It is on a roll.
For the first time it breached Rs 69 to touch Rs 69.09, making it one of the worst performing currencies in Asia. It has shed 7.7 per cent this year and is slightly ahead of the Philippine peso. The rupee had strengthened 6.75 per cent against the US dollar last year, but has been on a general downtrend since the beginning of 2018.
A weak rupee and higher oil prices may accelerate inflation and force the Reserve Bank of India to hike interest rates further. Despite hopes of the government it may cause impediments in the economic recovery as cost of all imports, including petroleum would rise.
Some financial investment companies such as Janus Henderson has sent warning against putting money in India, Indonesia and the Philippines. The three countries are net importers of oil and may see their current account deficits worsen,
As the US interest rates are expected to rise further, the investors may further turn towards it. It may aggravate the world scenario. In fact, it is just not India, other Asian currencies such as the Chinese yuan, the Singapore dollar, the Malaysian ringgit and Indonesian rupiah are trading in the red.
The political situation in Jammu and Kashmir, Trump’s directives to India to stop importing Iranian oil and his belligerent attitude against “high 100 per cent Indian tariff” are spanners that could scare away the investors. This is against the government’s hope that more investments should pour in. The dim hope is in US companies like Harley Davidson moving out their manufacturing to other areas. But would Trump allow it?
The US move against dealing with Iran has other ramifications as India is investing in Iran to open up routes to Afghanistan and Central Asia. This apart, Tehran has always stood as a trustworthy friend. Trump’s animosity towards Iran is a diplomatic move to increase its oil and arms sale and browbeat its Asian neighbours. The pressure on Iran is deliberate and not because of its so-called nuclear ambition. Citing Iran as a bĂȘte noire helps it keep the oil prices high as supply crunch continues and competition is eliminated. Besides, such moves put countries such as India in a tight spot.
There is no easy solution to this critical situation. Despite issues like J&K and women’s safety being domestic subjects, the United Nation, apparently under US pressure is raking these up to paint an uncertain domestic scenario, though this is not the reality. Such maneuvers too certainly scare away the investors.
Despite over $426 billion forex reserves, the FDI flow remains moderate. According to Department of Industrial Policy and Promotion (DIPP), total FDI during April-December 2017 was at $35.94 billion. The World Bank has stated that private investments in India is expected to grow by 8.8 per cent in 2018-19 to overtake private consumption growth of 7.4 per cent, and thereby drive the GDP growth. There are projections it may touch an annual $ 75 billion. But the moves of Trump may cause upsets.
The currency is expected to weaken further, according to analysts including those from Australian bank ANZ and Dutch lender ING. This has a high cost on the Indian economy and consequently on other economies of the sub-continent and South-East Asia.
For the government it means tightening the belt at a time when public investment alone is supposed to move the economy up. It is likely to hamper creation of jobs and investments, cost escalation and slow down of many projects in a crucial election year As the rupee depreciates amid fears of further rise in oil prices, country’s current account and fiscal deficits may widen.
India is a net importer of oil and every increase in price, coupled with rupee value could worsen its fiscal balances maybe by over one to two per cent of the GDP. This is likely to hit its growth projections.
Another fall-out of rupee depreciation would be the increased outflow of forex for its imports. Often it is said that it might increase its exports but the earnings in dollar terms would be nominal. Indian diplomats are said to be good negotiators as they proved during various talks with the US nuclear non-proliferation, WTO and other issues. This time a beleaguered US, battered by its prolonged wars in West Asia, including in Syria and Afghanistan, engagements in South China Sea and as Trump says with little support from its NATO allies in the EU, is unlikely to yield concessions easily.
Whether the Indian counter tariff moves would help or it has to go back to the negotiating table needs to be watched. A suggestion often given is to rake up the rupee value to stem the loss of forex as well as the onslaught of crude oil prices. The international money market and not the governments or central banks decide the rates. These are decided on many factors and primarily on the purchasing capacity of the currency. Various other economic activities contribute to it as well. Machinations by foreign powers also cannot be ruled out. Trade war manifests in a move to keep the Asian powers in an economic tight spot and the currency is the easiest tool.
There are suggestions to reduce imports. Good. But how to check oil imports that keep the nation’s lifeline alive? How to stop critical arms purchases and technologies? While suggestions are easy to give, over the years the rupee has been on a continuous fall. No economist, or RBI or Planning Commission or NITI Ayog could come out with a way to stem it.
Trump has ensured, for the present, world business and finances look towards the US. All others are looking for avenues. He has won the first phase of the trade war. There is nothing to be pessimistic. Countries such as India have the strength and capability to find new ways, forge coalition and methods like the recent concession on soya exports by China. The world has always come out of such criticality but the big question is how long would it take?—INFA