"I look at it not as rupee sliding but dollar strengthening" — Finance Minister Nirmala Sitharaman
The recent statement made by Finance Minister
Nirmala Sitharaman in Washington DC — that it is not as if the Indian rupee (INR) is getting mauled (all time low of Rs 82) as much as the US dollar has been rising — is true to a large extent.
But, Congress leader P Chidambaram was quick to take potshots at Sitharaman.
She is being pilloried by her detractors back home but a moment’s reflection would bear her out — the US dollar has been rising against competing hard currencies like the Euro, the British Pound and the Japanese Yen. INR isn't a hard currency.
The greenback is a safe haven asset for most of the central banks and investors along with the yellow metal. So, what one is witnessing, especially after the outbreak of hostilities between Russia and Ukraine, is an instinctive lurch towards the dollar.
This has been aided by the successive interest rate hikes by the Federal Reserve, making dollar even more attractive — which is why, Foreign Portfolio Investors (FPI) have been dropping Indian shares and bonds like hot potatoes.
It is widely known that the INR’s and Sensex’s fortunes have hinged on dollar flow — a substantial net inflow works in favor of both and vice-versa.
We have been paying a price for relying heavily on Foreign portfolio investment (FPI) which is hot money at the end of the day. The world too has been paying a heavy price for putting the greenback on an undeserved pedestal.
After the second world war, the US in 1944 made its gold peg of the dollar going by the name of gold exchange standard even more attractive. Let any sovereign government, anywhere in the world, bring tranches of US$ 35 and take away an ounce of gold.
That lent solidity to its currency and the world fell for the ploy line, hook and sinker.
Paul Erdman tells in his vastly infotaining novel 'The Billion Dollar Sure Thing" how the gold peg was an audacious move by the US government. Its calculations were almost Machiavellian.
It knew all along that its gold reserves were never enough to underwrite its currency which incidentally enjoys a greater circulation and purchase outside the US rather than inside.
Yet, it chose to brazen it out knowing pretty well that sensible governments would not wrench away their dollar deposits in favour of gold because while dollar deposits earn interest, gold doesn’t beget any income.
At the peak of the first gulf war in 1973, Eurodollar combined with petrodollar dared to question and humble the greenback on the back of ever-increasing price of the yellow metal. But before any major damage could be done, the Nixon administration pulled its chestnut out of fire, ending the dollar-gold peg as audaciously as it was instituted!!
In 2019, the share of US dollar of the total foreign exchange reserves of central banks was 62 percent with Euro hogging a pathetic 20 percent coming a distant second. This intuitively should be much more skewed in favour of the dollar post-pandemic and post Russian hostilities.
Remember, Euro was launched with a lot of fanfare and expectations on 1st January, 1999. One of the expectations was it would give dollar a run for its money and remove it from its undeserved hegemony as a currency of international settlements.
Alas, the Euro hadn’t flattered to deceive.
The Indian government initiative in promoting rupee trade is a step in the right direction if only for its emulative value. Other nations of the world can take a cue and start dethroning the US dollar gradually.
There was no reason why India should pay for its Russian crude in US dollars. The Indian government got a positive response from Russia on this score, with Russia being put in the US doghouse.
Similar worldwide initiatives would be welcome though to be sure the greenback is too firmly entrenched to be uprooted from the global financial consciousness any soon.
What Sitharaman did right
Reverting back to the purported gaffe of Ms Nirmala Sitharaman, she could have hammered in her message more forcefully but she was on the American soil attending the Bretton wood twins annual meeting.
She couldn’t possibly have embarrassed her hosts by questioning and challenging the contrived international reserve currency status of the greenback.
But the Indian government can take other measures to shore up the INR vis-à-vis the greenback by boosting exports, placing emphasis on import substitution especially in semi-conductor and gold as well as by reducing the generous permission for forex repatriation by Indian residents under the Liberalized Remittance Scheme - 250,000 dollars per annum.
Make in India has been making its impact on cell phone manufacturer, thanks to the production linked incentive scheme. We can similarly position ourselves as the hub for armaments industry.
Admittedly, the solution to weak INR cannot be simplistic but host of correctives endogenous and exogenous.
(S. Murlidharan is a CA by qualification and writes on economic issues, fiscal and commercial laws. The views expressed in the article are his own)
Read his other columns here First Published: Oct 18, 2022 9:50 AM IST
