The story of the falling rupee: Why is the rupee so weak? And what can be done to pull it up?

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SummaryUnder a floating exchange rate regime, the market determines the value of the exchange rate.

rupee even further.

Adding to the effect of these factors is the US economy showing signs of revival. There is indication about quantitative tightening where the Federal Reserve is likely to reduce government bond purchase by $10 billion (from $85 billion per month to $75 billion). This has further strengthened the dollar against most Asian currencies. The likely attack by the US on Syria has already shot up the crude oil price to $113 per barrel. In fact, gold in the international market is now trading at $1,400 per ounce (around 28.3 gm). In India, gold is trading at R34,000 per 10 gm when it should have traded at R24,000, with R50 to $1 as the exchange rate. Much of the shooting price of gold can be explained through the weaker rupee.

Ways to arrest this fall? First, create an environment for long-term capital investment. Capital surplus countries such as Japan are keen on investing in our infrastructure. The value addition of a dollar invested in India’s infrastructure is higher than many places in Asia, including China. This is however conditional that we create necessary environment for investment. Second, improve trade relation with Iran. This will allow India to import oil in rupee, not spending from its dollar reserves. Third, implement government-funded programmes better. Reforms push such as direct cash transfer are a welcome move and are expected to plug leakages in the system. Another way to increase effectiveness is to make the programmes more flexible. In the case of MGNREGA, unskilled labourers were used to build rural infrastructure. Instead, MGNREGA labourers should also be allowed to be take up alternate activities such as working in agricultural farms, or in small and medium scale industries, depending on requirements. Likewise, the money sanctioned under any particular scheme, say, under the SSA to build schools, should be allowed to be used for the next best alternatives, say, building hospitals, if the village already has a school. This will ease inflation and may arrest the fall of the rupee.

The author is professor, Institute for Financial Management and Research, Chennai

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