Why is the Rupee declining?

The newspapers these days have been awash with news about the collapse of the Indian Rupee. From ₹44 to a USD, it has fallen to ₹60 today. And it is expected to keep falling; there's already talk about ₹70. Questions and confusion abound as to the reasons for its continuing fall.

There's been a lot of finger-pointing and blame apportioned over responsibility for this debacle. While the reason for the current sudden decline is the US economy's resurgence from recession creating demand for dollar assets, we need to take a long-term view here keeping the long-term trend of our currency in mind. The Rupee has been steadily depreciating since Independence. And for obvious reasons.

As this valuation chart on Wikipedia shows, from Rs.4 to a US Dollar in 1950, it had declined to Rs.18 to a Dollar in the 1980s. Then there was a massive forced depreciation due to the Balance of Payments crisis in 1991, and the Rupee fell to about 35 or so. Another decade, and it had fallen to Rs.44 in the 2000s. It is not surprising that it should fall again now to ₹60. And one can easily predict that it will fall further to the 70s, 80s and onward until the basic issue underlying a currency's value is resolved.

The fact of the matter is that India has continually run trade deficits since Independence. A trade deficit (or Current Account Deficit) is when our country buys more from abroad than it sells abroad. Why does this result in a trade deficit, you ask? It's quite simple.

Just as goods are priced in Indian Rupees in India, they're priced in foreign currencies abroad. So when you buy something from abroad and import it into India, you need to pay the foreign sellers in their own currency. For example, when India buys petrol from Saudi Arabia, it pays Saudi Arabia in US dollars. When Indian jewellers buy gold from abroad, they need to pay in US dollars. In order to pay in US dollars, India needs US dollars from somewhere. These are some of the ways the country acquires US dollars:

• By selling goods priced in US dollars in the world market. This is called exporting goods.
• It can borrow money from foreigners and pay them interest on their loan. This is done by issuing bonds and providing attractive interest rates.
• When Indian expats send their money home, they exchange this for Indian Rupees. They do this either through a foreign exchange dealer or through a government bank. This entity acquires US dollars or whichever currency was sold in exchange for rupees.
• When the Indian economy is growing healthily, foreign investors invest in India anticipating good returns. They bring in dollars, exchange them for rupees in order to invest within the country.

If India doesn't acquire sufficient US dollars through one of the means above, there ends up being a shortage of US dollars. This essentially means that there is unsatisfied demand for the US dollar. There are more buyers for the US dollar who are willing to pay more rupees for the currency. Since people are willing to pay more for the US dollar, you need more rupees to buy one US dollar.  Consequently, the US dollar rises in value and the rupee falls.

Given this understanding, it is quite easy to see how India can reverse the decline of the Rupee. There are two ways, both of which can be adopted:

• Buy less abroad. This would mean cutting down on imports. Petrol import can only be avoided by developing indigenous energy sources, be it nuclear power, solar energy, switching to electric cars and so on. Imported goods will need to lose their attractiveness and that can only happen if locally manufactured goods are of equally good quality and brand caché.
• Sell more abroad. For this to happen, India needs to manufacture goods that the rest of the world wants to buy. We need to develop local manufacturing capability for high-quality and high-margin goods that people abroad will pay for using their US dollars. As of now, there is nothing of real value that India exports other than basic foodgrains and raw materials which are low-margin goods. And IT skills, of course. We need to learn from our East Asian neighbours and start building a top-quality manufacturing industry. This will not only reverse the Rupee slide but will also provide jobs to all the unemployed people in the country.

The way out is fairly clear-cut. It is really up to people in India and our government to see the picture in its black-and-white simplicity and act accordingly.

Implications of a depreciating currency are bad all around. When a currency declines, it fuels inflation because all the things we need from abroad like petrol become more expensive in Rupee terms. Petrol is the underlying price basis for all goods within the economy and when it goes up in price, everything goes up in price. In contrast, when a currency rises in value, things we buy abroad become cheaper and this helps keep prices low. What cannot be manufactured within the country can be bought abroad cheaply thus improving quality as well as supply of all goods.

Reserve Bank of India to issue ₹10 (10-rupee) polymer notes

While Googling around for news on the Rupee, I found some interesting articles about how the Reserve Bank of India (RBI) has been trying to improve the production and distribution of currency. I was surprised to learn that a note only stays in circulation in India for 6 months before it is so dirty, torn or crumbling that it gets turned in to a bank for a replacement with a fresh one. We've all noticed that in the past few years, the number of such mutilated dirty notes that we handle has gone down drastically — none of the notes in my wallet strikingly enough are in so much as a creased state which was unheard of a few years ago. I used to put this down to luck, but was enlightened by this article about the RBI's Clean Note drive that puts this down to active effort by the RBI than random chance. It also talks about how the coin situation has been drastically improved. In the past, coins used to be Holy Grail material. People would hoard them and would be loathe to part with them. Transactions would end up abandoned because neither party was willing to part with their much-prized 50p, ₹1, or ₹2 coins. While the tendency to hold suspect anyone who hands out a whole amount note expecting coin change in return, as having nefarious designs to finnagle coins out of you is still there due to the history of our experience with the dearth of coins in circulation, it is disappearing due to the abundance of these coins these days, again due to the drive mentioned above which has dramatically improved production capacity. As part of this drive, the lifetime of a banknote has also been extended as banks have been prohibited from stapling notes which they used to do with abandon earlier, leading to mutilated notes being put into circulation right at the bank.
Also interesting and the reason for this post, is that the RBI is expected to issue 100 crore ₹10 (Rs.10) polymer or plastic banknotes by the end of the year (another article about this). These notes have loads of top-of-the-line security features such as the see-through plastic feature seen on Australian notes which is nearly impossible to counterfeit, have much higher durability (RBI estimates a polymer note to last in the Indian market for 5 years as opposed to the 6 months a paper note does), can be washed and are very difficult to tear or otherwise mutilate. It is expected to save the Exchequer ₹580 cr (Rs. 580 cr) per year in production and distribution costs due to the frequent need to replace paper notes. I understand that the polymer technology would need to be licensed from the Reserve Bank of Australia which was the first central bank to introduce and fully convert to polymer notes in order to beat counterfeiters. While there are definitely problems seen in countries like Thailand and Mexico with the print on polymer notes fading in a couple of years, sticky notes being difficult to handle and so on, I'm still looking forward to the ₹10 issue - it's great technology, clean washable notes in my wallet will be a plus, I'm curious to see the design for these new notes, and I wonder how Indians will react to them.

Rupee symbol (₹) now part of Unicode

The newly minted Indian Rupee symbol (₹) is now part of Unicode and has been assigned codepoint U+20B9 in the Currency Symbol block.While we await the OS manufacturers to ship out updates to add this symbol to their system fonts and also make it available for typing in when one installs Indian locales - the Indian government has apparently mandated ^⌥R (Ctrl-Alt-R) as the combination to be used to input the symbol - individual font designers have already come out with easily usable fonts for the symbol at the correct codepoint. The first one to be published is the Rupakara (रूपकारः) font designed by Mr. Michael Everson from Ireland and made available for free via an open licence. You can download it from these locations:

http://www.evertype.com/fonts/rupakara/

http://blog.foradian.com/rupakara-first-font-with-indian-rupee-symbol

To use it on a Macintosh, download the 4 TTF files, select them all and open them in FontBook, and click on "Install Font" to install the font on the system. After you do this, you should be able to see the symbol correctly on any documents or webpages that encode it at the Unicode codepoint U+20B9. As a test, the following sentences should make sense to you and display the symbol correctly:

• The evidence of massive runaway inflation is all around us: In Mumbai these days, you can buy a litre of dairy farm milk for ₹36 and a kilo of dahi (Indian yogurt) for ₹60 which is almost double the price a few years ago! Onions have gone from ₹7 a kilo in 2008 to ₹36 today!!
• आजकल मुंबई में एक लीटर दूध का भाव ₹३६ है और एक किलो दही का ₹६०, जो कुछ ही सालों के मुक़ाबले दुगना है!
• ₹36/litre = ~$3.15/gallon @ $1 = ₹43 as of today.

While you can view the symbol, in order to type it, you need to jump through a few more hoops, until Apple releases a keyboard shortcut for the Rupee (ideally, it should be⌥ (Option) followed by some key in keeping with the Mac custom). In the meantime, you have two options:

• Use the Unicode Hex Input utility: This allows you to type in Option followed by the codepoint (20B9 in our case) to have the symbol encoded at that codepoint to appear. It's available in the Input Source viewer once you have enabled it through  > System Preferences > Language and Text > Input Sources.
• Use the Character Viewer utility to pick out the Rupee symbol and add it to Favorites. Whenever you need to insert the symbol, pick it from the Favorites list and click Insert. You can also use the Clipboard for convenience.

If you have any questions about any of this, feel free to send me a comment. It's quite simple and straightforward, so Enjoy!