Is the Rupee heading for a crash?

Slowly but steadily the nation’s forex reserves, and the value of the Indian Rupee, are falling. In March 2022, the Rupee looked fairly stable at Rs 75 to a Dollar. Three months later, it has dropped 6 per cent, and the downward journey could well end in a crash.

It last happened in August 2013. After months of stumbling, the Rupee crashed spectacularly by more than 10 per cent past the Rs 60-to-a-Dollar mark due to poor foreign debt management by the UPA government. The economic adviser to PM Manmohan Singh, Raghuram Rajan, was made the RBI Governor to manage the forex crisis and arrest the Rupee slide. Rajan managed to arrest the slide, but RBI Governors can’t revive economic health.

In 2004, when the Vajpayee government was voted out, the foreign debt was well covered by forex reserves and the Rupee was extremely stable at Rs 39 to a Dollar. Nine years later, external debt had grown by a huge 350 per cent to $390 billion, and the forex reserves cover fell by 25 per cent. But the real reason for the Rupee collapse was that the short-term debt component that was manageable at 3.9 per cent during Vajpayee era had jumped to 33 per cent during UPA II and had to be paid back in a nine-month timeframe.

Nine years later, in 2022, the external commercial borrowings (ECB) and short-term debt component has once again spiralled. The Rupee has weakened once again and is set to touch 80-to-a-Dollar, despite close monitoring by the RBI which sold $41 billion in five months to compensate for unprecedented portfolio withdrawals.

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In March 2022, the short-term debt that was due for repayment this year was $267 billion. It was 43 per cent of the total external debt of $620 billion, as per the RBI. With the forex reserves falling to $593 billion in June, the payout is 45 per cent of India’s foreign exchange reserves. While the drop in foreign exchange reserves was due to sharp increase of Dollar payouts over forex inflows, this crisis was not due to the oil price surge alone.

As per data released by the Commerce Ministry for the period April to November 2021, just a quarter of imports, worth $30 billion, was from Saudi Arabia and Iraq, the two main oil suppliers. The biggest imports into India from China ($43 billion) included electronic equipment, mobile phones and gadgets, and from Switzerland ($16 billion) and UAE ($10 billion) included gold, gems and jewellery and luxury goods.

The external debt-to-GDP ratio improved marginally to around 20 per cent for the year 2021-22. Despite this, the debt servicing ratio fell from 8.2 per cent last year to 5.2 per cent, reflecting higher current receipts. After the Russia-Ukraine conflict began, crude prices rose and forex reserves slipped below $600 billion. In the first two months of the current fiscal, the trade deficit doubled, to $44 billion, when compared to last year. In May, oil imports rose by just 2 per cent as demand slowed due to rising crude prices. Yet the trade deficit surged past $24 billion, with non-essential luxury goods imports taking the lead. As stock and property prices nosedived, gold imports jumped 10-fold as compared to May 2021 as rich Indians sought secure investment avenues. Not much was done to arrest the trend.

June 2021 was worse, as the trade deficit further widened. The regressive tax on exports of steel to bring down inflation hit the industry as well as widened the trade gap. Surprisingly, import duties were not levied to cool steel prices but exports were taxed. It was followed by the windfall tax on the oil sector. The disincentive for being globally competitive in exports had repercussions. Exports got hit by indiscriminate taxation and stock prices plummeted. The luxury goods imports kept growing and the trade deficit for the first quarter more than doubled to $70 billion-plus, as against $31 billion for the same period last year.

Another weak link is the rise of short-term debt, which is largely corporate debt (not government debt) in foreign exchange that has to be paid back this year. The repayment of $267 billion due this year can easily be minimised if the corporates are told to ensure that these loans are converted to loans having three-year repayment. This is a much easier solution than trying to go all out and defend the Rupee by buying Dollars.

The government has been active during the past few months taking measures to save the economy and the Rupee, but not all actions have been helpful. It is time to curb non-essential imports and rising short-term debt and find ways to slow them down.

(The writer is a journalist and author of three books on economic governance)