The Indian economy has widely been regarded as a strong, emerging economy alongside fellow members of the “BRICS” group – Brazil, Russia, India, China and South Africa. However, the economy has suffered from “Monsoonal” headwinds and the currency has fallen to fresh lows against the US Dollar. In 2008, a US dollar would buy you 40 Rupees; today it will buy you 67.7 Rupees (having fallen back from a high of 69.06). Indeed, the Indian currency has fallen by more than 20% against the Dollar this year – which has itself appreciated by 25% against the Japanese Yen, making Japanese imports to India now prohibitively expensive.
The underlying reason for the Rupee’s decline is that growth in the Indian economy has slowed to its lowest rate in ten years. Equally, India and other Asian nations saw stock values bolstered by inflows of cash from US stimulus measures as a knock-on effect. The fact that support will be ending sooner or later has caused these markets to decline since May. An additional problem for India is that it needs to import 80% of its oil needs and oil is priced in Dollars. The falling value of the Rupee is having a negative effect on India’s balance of payments because of this.
The Indian authorities have acted to try to stem the fall of their currency by approving infrastructure projects worth $28.4 billion; the imposition of currency export restrictions on businesses and individuals; increased interest rates and a cap on daily borrowing; and increases in the duty on imported gold, a significant component of the nation’s imports.
It has also just been announced that the Central Bank will sell US Dollars directly to oil companies providing $300 million per day to the nation’s three oil companies in a bid to prop up the Rupee. Whilst this represents the nation’s major trade in Dollars on a daily basis, it is unlikely to provide a permanent solution; particularly if geopolitical concerns send the oil price significantly higher.