When the global economy was doing well between 2002 and 2008, the rupee was stable at Rs45 (Dh2.6) to a dollar. As the US and Eurozone slipped into crisis, the health of the rupee was not much affected. It started to decline only in 2012 just as the global economy begin to look up.

The US and Europe are coming out of recession. The rupee is strangely falling when the global economy is coming out of the crisis.

Is the global situation responsible? Only to an extent. The petroleum crude prices hovered around $140 (Dh514) a barrel in 2007. Later, it fell sharply below $100. This was also the time when countries came under stress and stopped buying Indian goods. Exports started falling and with it dollar earnings.

Policy makers did not realise the problem. They did not create an environment for helping businessmen to reduce their prices. Domestic inflation — over 36 per cent in three years — and boost to consumption started creating a spiral. Imports went on increasing and as dollar inflows reduced, outflows increased. That is how India’s current account deficit (CAD) — less exports and more imports — has risen to 4.8 per cent of its gross domestic product (GDP) and may go up further along with its fiscal deficit.

High domestic inflation is slowing down economic growth. It has been halved from over nine per cent to almost five per cent. This has come with accompanying problems of poor job growth. In reality, more jobs have been lost during the last decade. Since 2004, only 2.7 million jobs were created against 6 million in the previous decade.

Government finances

This has further created problems for the rupee as high joblessness and inflation are impacting government finances in more than one way. It has forced the government to come up with schemes such as the rural employment guarantee scheme, cash transfer of subsidies and now food security to all those unable to afford high prices.

Coupled with high energy prices — imported crude, domestic natural gas and electricity — the manufacturing cost is increasing. It has led to higher prices and fall in industrial production.

India is currently depending on high wages of government employees to sustain whatever growth it has. This has led to increase in imports of non-essential goods such as toys from China. This further erodes the foreign exchange deposits. Less the deposit, more the rupee loses against foreign currencies, particularly the dollar.

Foreign investment has also been hit during the past few years. The foreign investors are wary of taking risks. The foreign investment receipts fell from $43 billion to $8 billion at the height of the crisis in 2008. As investors started looking for opportunities, it bounced back to $43 billion a year till 2012.

But the problem was that India had been utilising foreign investments to sustain its consumption. Foreign investment is meant for capital receipts — for building assets — but India had been spending it to meet current expenditure, says B Jhunjhunwala, an economic analyst. It squandered away an opportunity. When it should have applied brakes on unnecessary imports, it allowed it freely, he adds.

Capital repatriation

Only now, it is applying brakes on capital repatriation by individual and foreign investors. There is a reason for this. Many Indian firms and individuals were sending out their own dollar deposits abroad on short-term basis and bringing it again as the rupee fell further. They made profits, but the country lost in a major way.

But the brakes are unwelcome, most foreign investors say. “While the authorities aim to reduce forex volatility, we fear that they may end up sending a panic signal,” says Sonal Verma, economist with Nomura broking and research company.

This has also activated the almost dormant, parallel illegal money transaction routes (hawala). It also increases chances of money laundering.

The rupee has been shaken further as the US Federal Reserve said it would begin reducing its stimulus to the economy, prompting foreign investors to sell assets in emerging markets, ranging from India to Brazil.

Foreign investors are becoming wary. Of late, investments have slowed down. Even foreign institutional investors (FIIs), who invest short-term in stock markets, are pulling out. UBS strategist Manik Narain says: “India is losing control over the currency and you are starting to see the weakness transmitting to stock markets. There could be a self-perpetuating cycle where currency weakness flushes out equity investors and that makes the rupee weaker still.”

The rupee is one factor. The domestic economic and political uncertainties are also adding to the problem. Possibly, the roller-coaster ride may continue till the 2014 general elections, finance ministry officials say.

— The writer is a freelancer based in India.