In January 2008 the dollar fetched Rs39.27 and now it is hovering around Rs60, thus losing about 34% of its value. Due to the practically free import policy, relatively free and unrestricted travel abroad, billions of dollars are being utilized, leading to deficits

It is true that Benjamin (Ben) Bernanke, chairman of the US Federal Reserve, caused a worldwide monetary tumble by slowing down the bond buying programme, which in all possibility may come to an end by the close of the year.

This simple indication has resulted in the dollar strengthening against major world currencies.  Since April this year, except for the British pound and the Chinese Renminbi (Yuan, as it is popularly known), a number of currencies such as the Brazilian Real, Rand, Indian Rupee, Mexican and Philippines Pesos, Russian Rouble, Turkish Lira, Indonesian Rupiah, the Malaysian Ringgit, Thai Baht, South Korean Won and the Euro fell by various percentages. The lowest was the Euro at 0.15% while the South African Rand fell by 13.99%.

Each country has its own domestic reasons and relatively poor export performance may have caused this fall apart from the issue of GDP and the rest, but  the very fact that the US may have to slow down the bond buying may have additionally precipitated this fall!

This is an extremely difficult and unpredictable subject to handle and fathom, as so many factors play a role in the process.

As far as the Indian rupee is concerned, first and foremost is the crossing of the Rs60 barrier that had somehow held up for more than two years. And a few days ago, it crossed this threshold.

It may be recalled that in January 2008 the dollar fetched Rs39.27 and now it is hovering around Rs60, thus losing about 34% of its value. Exporters are happy for this windfall gain, but, the importers have to pay so much more to get their goods.

Is this depreciation of the rupee a temporary phenomenon, or is it likely to slide further down to Rs62-Rs65 range?  And, will it stop there and what are the chances for recovery? Very difficult to say and even more difficult to predict!

And what should the government do, what role can the Reserve Bank of India (RBI) play effectively to stop this fall?

The first is the international repercussion due to the worldwide reaction to the Federal Reserve’s move.  On this, none but the US has the control.

Second is the peculiar situation of black market trade that is highly prevalent in the rupee exchange rate due to the ‘hawala’ transactions. As we write this, it has come to light that four trucks carrying money, jewellery, etc from Mumbai to Gujarat were caught with some Rs200 crore worth of these materials, said to be for settlement of ‘hawala’ transactions, and the investigation is still going on. This racket is several decades old and in spite of various attempts, there appears to be no end in sight.

The third important factor is that billions of dollars are remitted back to India every month by the expatriate Indian population working abroad, particularly in the Middle East. No doubt there is substantial transaction of this expatriate wealth that takes the ‘hawala’ route!

Fourth is the huge amount of money that has been stashed away in Switzerland and other countries on which the government has the relevant information, but for reasons known to it, is not making the details public. This lot, of course, has escaped the tax net of the government and generally classified as “black money” abroad on which discussions have been going on for years.  It is a separate issue that such large sums of unaccounted, un-taxed money, also known as black money is within the country, running a parallel economy.

Finally, due to the practically free import policy, relatively free and unrestricted travel abroad, billions of dollars are being utilized, leading to deficits. In fact, today, our foreign exchange reserves are now roughly 15% of the GDP, which is one of the lowest in the region.

And, on the top of all these not-too-rosy conditions, general elections are only a few months away.

With all these in the background, what are the steps that can be taken to protect the rupee?  Here are some suggestions for the government:

               a) Consider seriously establishing two rates of exchange for the rupee against the major currencies

               b) instead of allowing the rupee to float, officially devalue the currency and fix a realistic price of exchange. The real value of the rupee may be pegged at about Rs63 to a dollar

                c) this is probably the going rate for ‘hawala’ transactions; such a rate may help to eliminate the ‘hawala’ system altogether

                d) encourage expatriate Indians working (and living permanently abroad) to remit funds through banking channels

                e) such NRI/OCI remittances be given an additional rate of interest benefit, if the FDRs are for three years or more

                f) discourage and restrict items of imports that are easily obtainable from indigenous sources; all such finished goods, if imported, will have to pay a penal rate of import duty over and above existing levels; all items under ‘OGL’ need to be reviewed and curtailed where possible

                g) all imports of essential raw materials, capital goods and maintenance spares, obtained under export incentive replenishment licenses, like the erstwhile schemes, will have a lower exchange rate so as to encourage exports, which will earn higher rupee rates

Unless the government takes serious steps, including the total ban of reckless import of gold, the rupee is heading for a further fall.

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)