“QE TAPERING : Is Indian Rupee Doomed ?”

The year 2013 was a historic one as the Indian rupee went Rs 68.80 against the US dollar, it also witnessed the single biggest fall in value of INR at 256 paisa against the reserve currency of the world. The Indian economy came unscathed from 2008 financial crisis but since then it has been spiraling down in terms of the value of INR which has come down drastically from its peak values of Rs. 38.80 for a USD in Feb. 2008.  This depreciation has accounted to many factors like policy paralysis on government front, a widening current account deficit, strict investment norms etc. But the factor that tops it all is tapering worries of Quantitative easing by US government.

Quantitative easing is a fiscal stimulus measure taken by the central bank of a country involving purchase of distressed assets in the market for injecting liquidity into the economy and breathing life into the otherwise soft demand conditions. The US government carried out a series of quantitative programs to revive the economy from the sub-prime crisis of 2008 and as a result it ended up creating excess liquidity into the financial systems all over the world.

The 2008 crisis was itself a unstable mortgage bubble and now this quantitative easing has resulted into an enormous investment bubble, which depicts that the US economy is on its way up. This improvement has led to the Fed considering ceasing the fiscal stimulus provided by these QE programs. The reverse of QE which is QE tapering is the suction of liquidity from the market by withdrawing from the purchase of assets by selling them once the economy is out of danger.

It’s not healthy for Indian economy as the Indian market is relatively less developed markets which offer a higher return on the investments as compared to western markets with near zero levels of interest rates and still anemic growth. Now, this suction of liquidity from the market would result in unsustainable stream of investments and the improving US economy would make investors to withdraw money from the emerging markets and put it back into the US. 

While the Indian rupee has taken a nose dive , the Indian share market have been reaching the new highs , which is a aftermath of reassuring Finance minister and appointment of new RBI governor. But, the state of stock market is very critical and foreign investors can any time put their money in the stock exchange and can withdraw as soon as possible which would result in the stock market crashing down.   

It’s not that the Indian economy is in the doldrums, but  we should look it in a way that the US economy has grown more than the Indian economy which has resulted in increase in the value USD against INR. Still, it’s not a good sign if a currency depreciates but it’s just a value it’s not the exact indicator of a country’s progress. Even if we put the New rupee price at 100INR = 1NINR then still there would be more effort which would e put into to earn the new rupee. We should look towards a stable recovery and not should focus on the numbers only.