INR

92.880

United States Dollar

The rupee hit a record of 68.81 against the dollar, but has recovered since to trade at the 63 levels against the dollar. As the rupee drops, it makes imported goods, particularly crude oil costlier, which raises the price of petrol and diesel, fuelling inflation across food, vegetable, consumer items etc.

Why does the rupee fall against the dollar?

The rupee is traded in the interbank foreign exchange market and moves according to demand and supply. Now, India runs a current account deficit, which means we spend more dollars then we earn. We spend more dollars when we use it for importing oil, gold etc.

On the other hand, we earn dollars by exporting goods, services and from repatriation from Indians employed abroad. So, if we earn $10 and we spend $20 in trade, we run a current account deficit, which is when the rupee starts falling against the dollar.

Emerging economies like India, Indonesia, Turkey, South Africa run current account deficits, which is why their currencies are most vulnerable to capital outflows. Not only the Indian currency, but most of the countries mentioned above, saw their currencies being whacked out of shape, when there was an outflow of foreign capital from the stock markets of these countries.

The currency falls even further when big foreign institutions, who have invested in Indian stocks and debt markets, pull dollars out, after selling shares and debt holdings. This was one of the prime reasons why the rupee hit a lifetime low of 68.81 against the dollar earlier this month.

Can black money stashed abroad help the rupee?

It most certainly can and will help the rupee to appreciate against the dollar. It is estimated that India's current account deficit would be around $70 billion for financial year 2013-2014. On the other hand, it is estimated that black money stashed abroad is to the tune of $500 billion according to reports. It is extremely difficult to get the exact estimates, but reports suggest that it could be around $500 billion.

Now, if we are able to get this money black money stashed abroad repatriated legitimately through the normal banking channel, we would be able to wipe out our entire current account deficit. Just imagine running a current account deficit of $70 billion and completely wiping it out by a staggering $500 billion inward remittance from black money, leaving a current account surplus.

In fact, even a country like Bangladesh has a current account balance to GDP that is positive.

India has a foreign exchange reserve of around $275 billion, which we can use to pay for oil imports for around 6-7 months. Imagine, almost tripling it by the $500 billion in black money repatriation.

In 1991, we did not have enough dollars for oil imports and India airlifted its gold (for pledging) for foreign currency loan from the International Monetary Fund. India was almost a bankrupt state in 1991 and thanks to some foreign currency loan we got from the IMF we could pay for oil imports. That's why its crucial to get that $500 billion, to boost our foreign currency reserves and help the rupee appreciate.

We are not in a similar situation today, but the high current account deficit is certainly worrisome. In times like these there is no better way than to target black money stashed abroad. However, there seems to be little inclination to target this money because the high and mighty seem to have their own money stashed abroad. Little wonder then, this thought has not even surfaced.

After all, why should I be worried over the falling rupee, when I have my money stashed in dollars. As long as the dollar does not collapse against a basket of major currencies, why should I care. I can continue to be happy with the "bandaid" measures adopted by the authorities to help the rupee.

GoodReturns.in