The rupee has seen a rapid fall in the recent days, touching a new low of 46 against the dollar on Monday. It had slightly recovered on Friday but the latest Lehman Brothers crisis in the US may increase the dollar outflow. The weakening of the rupee is not an isolated development. The dollar has been on the rise against all major currencies worldwide. There is a link between the dollar and global commodity prices. When the food, fuel and metal prices were rising, the dollar was on the decline. Now investors are withdrawing funds from commodities, whose prices are falling triggered by a slowdown in various countries, and are parking them in dollar assets. The dollar, which has seen the emergence of the euro as a major rival, has reasserted its supremacy in global trade.
Despite reasonable growth prospects, indicated by the latest official growth data for July, India has seen the outflow of foreign institutional investment. In the week ending September 5, the country’s foreign exchange reserves dipped by a record $6.5 billion. It is the steepest weekly decline since December 2005, when the RBI had to redeem India Millennium Bonds. The cash outflow has been provoked by the US sub-prime crisis, which has bankrupted quite a few top investment institutions. Though a weak rupee is supposed to benefit exporters, they are not cheerful due to lower demand in the US and Europe.
For Indians a strengthening dollar means costlier foreign travel and education. Investors stand to lose as the FII selling has brought down the stock markets. The government’s battle against inflation has got a blow as imports become expensive. All products with imported components will see a price rise. The advantage of the oil price fall has been partly wiped out by the rising dollar. The RBI intervention to prop up the rupee has been limited. Perhaps, it wants to enhance India’s export competitiveness.
