In the last couple of weeks, the external value of the Indian Rupee has been steadily weakening. The question that is being asked is whether this is a long-term trend or a short-term fluctuation or a combination of both.
First, the Indian rupee which is currently trading at Rs 63.67 to a dollar has already seen a low of Rs 68.30 before the RBI intervened to strengthen its value. They permitted the overseas branch of Indian banks to raise money to thwart speculators who were using the non-deliverable forward contracts to pull down the value of the rupee. The scheme generated $35 billion of borrowing, which of course we will need to pay with interest in due course of time.
Second, our foreign reserves, which comprise of money held in several currencies, gold and special drawings (SDR), stand at US $320 billion. Unfortunately, almost all this money consists either of short-term funds from overseas parked here temporarily, or borrowed money. As per data, foreign institutional investors have pumped in more than US $200 billion both in our stock and bond markets. Besides, our external commercial borrowing is in excess of US $150 billion. Also, NRI deposits are around US $60 billion. According to data, we carry a foreign exchange liability of more than US $460 billion as of date.
Third, our current account balance is always in deficit as a proportion of the GDP. Last year, we touched a high of above 4 per cent. Some efforts are currently being made to bring it down this year. We need to see how this pans out.
Fourth, the current global economic scenario suggests that the mighty dollar will become mightier. For example, the value of Japanese yen has dropped from 78 to 120 to a dollar. The value of euro has dropped from 1.37 to 1.21 to a dollar. As far as the emerging economies are concerned, the Russian ruble has dropped recently from 32 to 70 to a dollar. Similarly, the Brazilian real has taken a knock of nearly 20 per cent. In this environment, the rupee is relatively stable, at least for the time being.
Now, however, the situation is going to change. Janet Yellen, the US Federal Reserve chairman is considering hiking up the discount rate from its current level of zero per cent. This will definitely happen because the US third quarter growth rate released on Dec 26, 2014 stands at 5 per cent. Once she gives the signal for a rate hike, we will find the US Treasury’s 10-year bond yield moving up significantly. The spare US cash which is currently lying in the global money market in different currencies will find its way to the US Treasury. This action will push up the value of the dollar even further.
In summary, the Indian rupee’s value is most certain to go down against the dollar in the near term and probably hit the low 70s in the months to come. This is partly due to the dollar appreciation against other currencies and partly due to our economic mismanagement.
The declining value of the rupee will have a deep impact, both externally and internally. Externally, we face the same fate as that of the other emerging markets’ currencies. For example Russian Ruble has dropped nearly 60 percent. Brazilian real has dropped nearly 30 per cent. South African rand has dropped nearly 20 per cent. Financial analysts are expecting China to devalue the renminbi to stay competitive. This will force India also to let the rupee value down to maintain market share and to not lose their competitiveness.
As far as the internal value is concerned, India will be the most sought-after place to train people as it becomes a cheaper destination. India has an advantage over the other emerging markets. We have the highest potential to meet the skill gap with our large, young, English-speaking population. Training such a workforce will imply that India can become the major exporter in the services sector as well as an exporter of manpower itself. The world shortage of skilled manpower will stand at approximately 56.5 million by 2020. With a target of skilling 500 million by 2020, India can not only fulfil its own requirements but can also cater to the labor shortages in other countries such as the US, France and Germany.
There is a great demand globally for training in leadership. With lower costs due to rupee depreciation, we may be able to attract multinationals to India and use our highly skilled trainers. India could look at preparing the workforce for global opportunities so that it can utilize its premium position as the human resource reservoir.
In essence, the following will happen:
- Increased FDI in Skills
- Increased B2B partnerships between Indian and International companies
- Engagement with MNCs to provide skills solutions
- Reverse transfer of best practices from India to the world
It is very likely that India becoming the global manpower hub will take place in the not-too-distant future.