In an interview with AGI’s editor Ramita Tejpal, Dr. Sourindra Banerjee, Assistant Professor of Marketing at Warwick Business School, University of Warwick gives the reasons for decline of Indian rupee and what does the future hold for Indian economy. “The decline in the Indian rupee by nearly 16 per cent against the US dollar since May is a symptom of a much deeper malaise in the Indian economy. Three crucial reasons which originate due to the deep malaise in the Indian economy and drive the decline of the Indian rupee are as follows said Dr. Banerjee :
1.Foreign Institutional Investors “Since the financial crisis in 2008 Indian markets had greater focus on attracting short term money from foreign institutional investors (FIIs). This short term money was available in Indian markets because FIIs had less investment opportunities in the developed markets of Western Europe and North America. Moreover, short term money became more easily available because of quantitative easing in the developed markets. But, with the turnaround of recession hit developed markets foreign institutional investors (FIIs) have greater investment opportunities in Western Europe and North America. This has led to the withdrawal of investment by FIIs from Indian markets resulting in the decline of the Indian rupee. This situation is aggravated with the tapering of quantitative easing which results in lesser liquidity with FIIs and is forcing FIIs to withdraw money from Indian markets. This too is driving the decline of the rupee.
2.Crony Capitalism and Corruption “Secondly, India has been rigged by crony capitalism and corruption in the last 5 years. In the last 5 years a series of corruption cases (each involving of billions of dollars) benefitting the cronies of the political class have been reported in the media. This has battered the image of India as a reliable investment destination and has hit investor (both domestic and foreign) confidence adversely. The low investor confidence has resulted in India losing out on investment from both domestic and foreign players. Lower investment by domestic and foreign players in the Indian market has led to lesser capital formation, lesser employment, lesser tax collection and lesser consumption. All of these have a combined effect on driving the decline of the rupee.
India losing out on investment from both domestic and foreign players.
3.Policy Paralysis “Finally, the lack of reforms (which has been termed by the media as “policy paralysis”) has made the Indian manufacturing sector less competitive than its counterparts in other developing countries. This lower competitiveness has hit Indian manufacturing exports and has seen a surge in the import of manufactured items, in turn increasing the current account deficit for the country. An increased current account deficit depletes India’s foreign exchange reserves and pushes the decline of the rupee.
The Indian economy has strong fundamentals. In the long run, the economy will do well but as mentioned previously in the short run it is “wait and watch.”