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A few days ago, our Finance Minister Nirmala Sitharaman made an exciting comment. She was responding to a question on the sidelines of the World Bank and IMF meetings and she said — “First of all I would look at it as not rupee sliding, I would look at it as dollar strengthening.”
The rupee has already lost nearly 10% of its value compared to the dollar in the past year. On Wednesday it breached the ₹83 mark. And needless to say, this is deeply concerning. A weak rupee translates to a higher import bill and this is most obvious when you consider the price of oil. It’s already on the rise and you throw in a weak currency and it becomes even more expensive. This gives way to inflation and it hurts everyone.
And so you could argue that Ms. Sitharaman’s comments are deeply insensitive. I mean — What’s the difference eh? The rupee depreciates, the dollar strengthens — it’s all the same no?
What exactly did the Finance Minister say?
Asked about the challenges the rupee faced and what measures were being taken to tackle its “slippery slide”, Sitharaman said: “First of all, I would look at it as not rupee sliding, and look at it as dollar strengthening…dollar strengthening incessantly. So obviously all other currencies are performing against a strengthening dollar and…I am not talking technicalities but it is a matter of fact that India’s rupee probably has withstood this dollar…you know, rates going up, exchange rate in favor of dollar strengthening is there, and… Indian rupee has performed much better than many other emerging market currencies…”
So, the first point, is the dollar strengthening?
Yes, it has been strengthening “incessantly”, as Sitharaman said. To take the example of the rupee, a dollar was Rs 74.50 on January 1, it is more than Rs 82.30 now. The value of the dollar has been racing upward for more than a year now — against nearly every currency around the world.
So, the euro, which was 0.88 against the dollar on January 1, is now 1.02, and the British pound, which was 0.73 against the dollar at the beginning of the year is now 0.89. Over this same period, the Australian dollar has gone from 1.37 to 1.61, and the Japanese yen has zoomed from 115 to 148 against the dollar.
Why is the dollar strengthening?
At a very fundamental level, the US economy is doing better than other economies. Despite very high rates of inflation, the American job market has done extremely well and sectors like services have remained resilient. This has increased confidence in the market, and offset concerns such as those over a slowdown in the housing sector.
Second point, is the Indian rupee doing better than other currencies?
Yes, it is. While the rupee lost 2.6% against the dollar in September, breaching the psychological marks of 81 and 82, it has been among the more stable currencies in the current environment that has impacted, in varying degrees, almost all currencies and economies.
Therefore, the Korean won declined by about 6% against the dollar in September, and the British pound lost almost as much. The Australian dollar declined 4.8%, and the Swedish krona, Chinese yuan, and Philippine peso fell 4.6%, 4.1%, and 4.1% respectively.
Indian companies that have borrowed money overseas during the low-interest rate regime will face a reality check pretty soon. When the dollar appreciates in value, companies will have to shell out more money to service their interest cost. For instance, if earlier they could service $1 of interest with ₹75, now they have to shell out over ₹80 to service the same debt. And since interest rates are headed higher, Indian companies have hit the pause button on borrowing from the overseas market. Since April, no one has raised dollar money. In fact, it’s the longest dry spell in 13 years.
So yeah, even if we claim that the rupee is not sliding, a strong dollar is not going to make things easy for our economy.
Oh, and before you go.
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