Repairing the rupee: Here's how we can respond to global currency volatility

Indian rupee falling against the US dollar is more routine than an event, but lately the drop has accelerated and that is a cause of concern.

The rupee has gone down about 7 per cent against the dollar in 2022 and that eats into India's purchasing power, fuels inflation, and affects GDP growth prospects. RBI is burning forex reserves to keep the rupee from slipping below 80 against the dollar, as a breach of the chosen resistance point could allow the rupee bears to drag it lower and inflict more pain on India's economy. However, there is some relief for the rupee, as the dollar's explosive rise has left other key currencies behind and the rupee has appreciated against Euro, Yen and Pound.

A combination of shooting inflation and interest hike hysteria in the US is jerking the world round and about. The weaponization of oil and finance in the geopolitical tussle between the west and Russia is exacerbating inflation and recession worries everywhere and sucking global capital towards the dollar for safety. Speculators are counting on things getting economically and politically worse and they are shorting most currencies and buying up dollars.

India has its task cut out in managing the rupee's value against the dollar, as it remains hostage to oil prices and has to check its current account deficit to rejuvenate its economy after Covid. India's current account deficit is widening and net capital inflows are no longer filling the gap. The GDP growth is under stress because of the symbiotic relationship between rising inflation and falling rupee. India's businesses are feeling the pinch, because the majority of them spend much more in dollar than they earn in it.

Historically, the oil-rupee-dollar matrix has been the most powerful factor in India's economic, ideological and diplomatic choices since independence. In 1948, one dollar cost four Indian rupees and it now it costs 20 times more mainly because India must pay for foreign oil with dollars to move things. Indian even tried to suppress consumption, and by extension production, until the late 1980s to conserve dollars, and it practically allied with the Soviet Union to source dollar-free oil. Now, once again India finds itself seeking relief from an oil war and the resulting inflation surge and currency slide.

RBI is trying to shield the rupee from a crushing dollar by deploying whatever it has in its arsenal. It is selling dollars from reserves to deter rupee bears. It has increased import duty on gold and allowed higher interest rates on fresh foreign currency deposits by NRIs. It has also eased the limit on foreign portfolio investors in respect of government and corporate bonds and doubled the limit on foreign currency borrowings by companies. All this has not been sufficient to turn the tide, but it has held up the levee. RBI has even allowed invoicing and settling international trade using the rupee.

The cause of the rupee is not helped by restrictions and extra duties on export of commodities that the world desperately needs. India is wary of political instability that might result from diversion of food stocks, petroleum products, and industrial materials to exports. Also, Indian banks are not quite enthusiastic about garnering more expensive NRI foreign currency deposits in a volatile, low-growth environment.

The move to allow trade in rupee is an interesting one. India has settled trade in rupees in the past - the rupee-rouble trade with the Soviet Union is a prime example. India also paid for Iranian oil in rupees, until the US forbade it. In 2013-14, India entered swap agreements with many oil exporting countries. However, rupee deals could take time. For now, Russia wants everyone to pay for its oil and gas in roubles to protect its currency, though it is offering a big discount to India. Myanmar seems interested in paying India with rupees. Rupee's acceptance in cross-border trade in subcontinent is mostly unofficial.

To make Indian rupee a viable currency for international payment, India needs to earn the world's confidence in its economic strength and market freedom. China, despite its economic and trade heft, cannot persuade many countries to pay with yuan because of its policies and governance. India can try to revive rupee-based trade in the Indian Ocean region,  where Indian rupee used to be a common currency during the British rule. But for that to happen, India needs to offer attractive incentives for rupee trade and commit to consistent trade and financial regimes.

For now, repairing the rupee requires India to resist the rupee bears more aggressively, raise exports sharply using the rupee's decline, persuade the similarly suffering countries to trade using swaps where possible, and manage a feasible exchange rate for payment in rupees.

Maintaining a reasonable value of the rupee must be a high priority for India as it is critical to its economic and political stability.

Views are personal. The author is President, AIMA ,and Chairman of CavinKare.