Economy
Repair Rupee: Two-way currency exchange in trade

flickr/mikealex
What makes Rupee’s Dollar value oscillate every full moon night or anytime when you look at the Rupee wrong? Is it that the Indian economy fluctuates so very rapidly? Or is it that the Reserve Bank of India (RBI) suddenly decides to change the total currency in circulation. Neither Indian economy nor RBI’s fiscal policies exhibit the kind of epileptic seizures needed to match the fits in the exchange value.
Despite significantly higher growth rate of Indian economy than the US in the last three decades Rupee has weakened to half its value (to the current rates above ₹60 for 1 USD). Indian inflation, although much higher than US, even when compounded in the equation, is still insufficient to account for the rates. While it would not be fair to compare the exact exchange rate of 1966, where ₹7.5 was equal to one USD, because the rate was pegged by the government and not by market (and total Indian currency in circulation was insignificant compared to now), but it still serves as a good indicator of the overall downward spiral over the years.
This begs three important questions: What are the reasons for very high exchange rates and extreme fluctuations? More importantly, what impact exchange rates have on the Indian economy? Last but not least, can we do something to regulate the rates?
Reasons for high exchange rates and fluctuations in prices.
The main reason for high exchange rate and fluctuation is simply that India has decided that it will buy America’s biggest export: Dollar at any cost. Flow of dollars can be and is actually used to regulate the exchange rate. It does not mean that US Federal Reserve actions are to be blamed for each or even most fluctuations. There are many international banking conglomerates that regulate the international cash flow more than the not so federally controlled, US Federal Reserve. There is also an additional economic dimension that anyone’s classical training in the tradition of Adam Smith or Marx ill prepares for. Let us do a thought experiment. Say, US prints twice the amount of currency off a sudden but if the faith in US economy remains strong enough that inflation is not 100% but only 20% then US could grow its Dollar economy (not the whole economy) artificially by 80%. I am exaggerating the total potential of such expansion to illustrate a point that if a dominant economy chooses it can simply mint more money. Not all the US Federal Reserve and several international banking conglomerates’ actions are synergistic, so one should not view those influences as monolithic. Speculation market and the scope of influence of speculators on the exchange rate is a grey area. A flip side of the coin to high dollar value, is that given India does almost all its trade in dollar, a sudden decline in dollar value can send catastrophic news to Indian interests. So India has to rely on the peace and prosperity of US and hope it does not start another all consuming war with some country that might actually matter.
Impact of exchange rate on Indian economy
From our lentils, fossil fuels to our several high tech purchases, several key supplies to India come from the global market. Any fluctuation in the dollar exchange rate can send shiver up the spine of Indian economy. Also dependency on dollar means a constant need to always maintain high dollar reserves, preventing significant currency from being available for flow in the market. Dependency on dollar also means that the Indian foreign policy has to be additionally constrained by US interests than it would be otherwise.
What can we do about it?
India needs to start believing in the Indian Rupee, not just in speech and thought but also in action. India should not abandon US Dollar trade but embrace several more prominent currencies. India should aim to have a two-way currency exchange in trade with several key partners, just as the old Indian Rupee-Russian Ruble trade. In fact in some limited situations, government-to-government exchanges of direct assets are better in a trade. Even if some nations are not willing to have two way trade directly in Rupee, if the size and stability of their economy warrants, then embrace their currency. Diversify! Give our BRICS alliance with Russia, China, Brazil and South Africa some real teeth. It is currently all bark and no bite. A direct trade in countries’ currency will also promote stronger partnerships that are needed for Indian rise in the global sphere. India needs to get off the sugar addiction of US dollar and utilize it in value that roughly matches US-India direct trade.
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