The story of the falling rupee: Why is the rupee so weak? And what can be done to pull it up?

Sep 02 2013, 14:51 IST
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SummaryUnder a floating exchange rate regime, the market determines the value of the exchange rate.

10 gm when it should have traded at R24,000, with R50 to $1 as the exchange rate. Much of the shooting price of gold can be explained through the weaker rupee.

Ways to arrest this fall? First, create an environment for long-term capital investment. Capital surplus countries such as Japan are keen on investing in our infrastructure. The value addition of a dollar invested in Indias infrastructure is higher than many places in Asia, including China. This is however conditional that we create necessary environment for investment. Second, improve trade relation with Iran. This will allow India to import oil in rupee, not spending from its dollar reserves. Third, implement government-funded programmes better. Reforms push such as direct cash transfer are a welcome move and are expected to plug leakages in the system. Another way to increase effectiveness is to make the programmes more flexible. In the case of MGNREGA, unskilled labourers were used to build rural infrastructure. Instead, MGNREGA labourers should also be allowed to be take up alternate activities such as working in agricultural farms, or in small and medium scale industries, depending on requirements. Likewise, the money sanctioned under any particular scheme, say, under the SSA to build schools, should be allowed to be used for the next best alternatives, say, building hospitals, if the village already has a school. This will ease inflation and may arrest the fall of the rupee.

The author is professor, Institute for Financial Management and Research, Chennai

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