The way foreign institutional investors have been selling in the debt market since late May — $2.7 billion — has made it impossible for the rupee to withstand the onslaught. It has been the worst performing among Asian currencies, down 8.04 per cent since the end of April, and down four per cent in June alone. Chief economic adivsor Raghuram Rajan takes some comfort that the strengthening dollar also caused other currencies to weaken. But the government will be in self-denial to not recognise ground realities like India’s burgeoning current account deficit and a warbling economy. The saving grace is that dollars are still flowing into equity markets, but if FIIs decide to shift focus to stockmarkets in developed countries that are turning around, we could be in trouble as we depend so much on this “hot” money (that goes out at the slightest hint of trouble).
The weakening rupee will mean the government may have to hike its oil subsidies to over `1 lakh crore instead of the `80,000 crore that it was estimating. And while the government is rightly worried about gold imports, it is surprising that it is not showing the same concern over imports of electronic goods ($31.4 billion) and engineering items ($48.5 billion) that can easily be made in India. The depreciating rupee should be a wakeup call for the government to stop paying lip service to the small and medium sectors and give them a boost so that these items can easily be produced here.