ARYAN SPEAKS: The Free Fall of Rupee…Understanding it a Layman’s way.


rupee-up

Recently we heard about the free fall of rupee against the dollar, and we were told to grieve upon it and blame the government, God and everything else, and we did. Many of us took a step further and tried to understand why for the heavens sake this free fall even took place. But in their endeavor, they encountered heavy weight words like Current Fiscal Deficit, the Gross Domestic Product, the Gross National Product, the bond buying program etc. etc. and they lost their patience, dragged their cursor to the tiny red button with a ‘X’ on it, and found their way to the nearest bed. True…we all are not economists, and all the time, I suspect some kind of hidden grudge in it, the real economists put things in such a way that the non economist find it a hard nut to crack to understand what they actually want to say. Now, this is they way of those black suited people of asserting that they are economists.

But what about us engineers, who want every thing simplified and spoon fed, and that too on our laptop screens? In the Geeta, the God promised to visit us again and again to free us from evil and tyranny. So here I am, with my simplified version of a complexified problem, to fight against the tyranny of the wily code worded conversations of the bloody economists.

There are two simple reasons why the price of rupee falls against dollar…first, there are less dollars out there in country…second, there are more rupees in the country. Less dollars simply mean that every single dollar will cost more, and more rupees mean that every existing dollar can buy more of our rupee. Its just like when we have a fresh stock of tomatoes, we sell one tomato for one dollar. But if more tomatoes come in, in fear of rotting and to clear the stock, we start selling two tomatoes for that single dollar.

So, now we know that what things can cause the fall. Now, let us see what things triggered this fall. In May, the Central Bank of America thought that it was right time to announce that American Economy is expected to recover. This simply meant that now America was a better place to invest, and thus, the foreign investors started pulling out their money from India. So the amount of dollars in India decreased and as explained earlier, the value of dollar shot up.

Adding to this situation, our Sarkar, led ( HA HA HA..) by one of the greatest economists of our times, introduced the National Food Security bill. Do you want to know how much it is gonna cost us? Rs 1,25,000 crore. Now that’s called a whooping sum….it will cost us 3-4% of all the products we produce during a year ( this very thing is called the GDP… ) and about 21% of whatever we earn during an year ( and this is called the total receipt…). अब इतना पईसा डालोगे, तो GDP घटेगा , उस से export घटेगा , और फिर रुपया गिरेगा। अब ये हो न हो, मगर रुपया डर के मारे पहले ही गिर गया। मगर मेम साहब को कौन समझाये … अगले साल चुनाव जो है.

Again, the major imports of India are crude oil and, of course…Gold. Now, all the countries from which India imports oil demand payments in dollars. Once again, outflow of dollar. So, we need more and more dollars. The difference between exports and imports is called the current account deficit. And this difference owes to the heavy imports of oil, which we need to pay in dollars.  Dollars come in India in three ways…investments, NRIs and exports. The investing companies are going away, the NRIs are not coming back and since we are producing less, we are exporting less. इम्पोर्ट्स रोक नहीं सकते और प्रोड्यूस कर नहीं पा रहे. Again, the money supply, or simply, printing the notes, increased by 21% last year, but production did not increase. This means that more money was printed than required. हो गया ना KLPD…!!!

So, what did the government do?

It took its first step by increasing import duties on gold. Means, make the gold expensive, so the people will buy less, and there will be lesser imports. But this did not have any effect.

Now, reducing rupee supply would control the situation effectively, but there is a problem with this also. If rupee supply is reduced, the net production will go down and nations growth will be hampered as the purchasing power of people will go down.

What next? If you cant bring dollars in, stop the out going rupees. So, the Government introduced limits on the money which Indians could invest abroad. Also, they introduced limits on local investments.

And last but not the least….they tried to attract the NRIs to deposit more money in India, who, unfortunately, are more interested in withdrawing.

So, the firefighting steps of the government did more harm than recovery. But we cant blame the government for it. These are pan world phenomenon. So is the situation today with every growing economy of the world…be it Brazil or Russia or Malaysia. So, what is the solution? The predictions say that if we let the situation run itself, it will be the best. The government should keep the markets open instead of restricting. So, at some point of time, the Indian goods will become so cheap for foreigners that our exports will increase. As the exports increase, the production will increase….and at last, there will be an equilibrium between the inflow and the outflow and the inflation will be checked. Its not as easy as it sounds…but it’s the most feasible solution and the government will have to introduce it keeping its personal benefits in the upcoming polls at bay.

How can we help…?

We can help by being good Indians. कुछ दिन कोक पेप्सी छोड़ो और अमूल की लस्सी पियो….बाकी समझदार को इशारा काफी होता है…

जय राम जी की…

One thought on “ARYAN SPEAKS: The Free Fall of Rupee…Understanding it a Layman’s way.

  1. Great Post!
    I randomly picked this topic for my knowledge sharing session at the office, and I was in the same state that you mentioned in the first paragraph. Everything I read on the net was too much of economic terms. Thanks for making it really really simple. Looking forward to read you more

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