The rupee fell to all time lows yesterday, and while on the face of it — that is great for exporters and people earning in dollars, I don’t think NRIs should be too happy about this recent fall.
A little more than a year ago I wrote a post explaining why the Rupee is falling, and in that I mentioned the Rupee’s fall is more a symptom of underlying problems rather than being the real problem itself.
I had listed down some of the problems in this fish bone diagram, and if you haven’t read my earlier post, then I’d recommend reading that here: Rupee slide is a symptom, not a problem.
The real cause of the rupee’s weakness is the relentless deterioration in our economic policies in recent years. A falling rupee is simply a symptom of the underlying disease: unsound economic policies. After hovering around one per cent of GDP or less since 1991-92, the current account deficit in our balance of payments exceeded 2.5 per cent of GDP in 2009-10 and 2010-11 and is likely to have swelled to a new high of four per cent in 2011-12.
If you are a NRI and send money to India periodically, the lower Rupee might make you feel good, and make you feel that you are richer, but this feeling is pointless not because of the daily movement, but the direction that this Rupee fall has taken. It has been depreciating steadily, and the depreciation is both the effect and cause of several problems that make living in India that much more expensive.
I’ve spoken about the causes earlier, and you can read them again, but on the other hand, with the Rupee fall — the oil bill will increase, gold import bill will increase, and it will fuel our trade deficit, which is already in very bad shape.
Bad economic policies are already leading to lower growth, lower stock market and a high inflation, and more of these policies are likely to continue this situation. If you ever plan to come back to India then these conditions are not good for you. Of course, if the current government starts fixing the problems, and the Rupee goes back to 45 – 50 range, then the current rate would’ve been great. I don’t see a situation where the economy improves and the exchange rate continues to depreciate.
What if you were just buying real estate or assets in India and just intended to own them as assets? In that case, when you convert them back to USD eventually – Rupee depreciation is even worse. Just ask the people who opened NRE fixed deposits. The interest they get is lower than the depreciation so they are net losers.
The current context of Rupee depreciation is bad economics, and there is nothing to rejoice in that.