Rupee Decline - Reasons..

Every article written on this topic has put forth tapering of QE (Quantitative easing) by US Fed, widening of India's CAD (current account deficit), a stubbornly high inflation and fiscal profligacy (the act of splurging budget money) by the Indian government as reasons for the rupee decline. A deeper look at the situation reveals that these are only symptoms and not cause(s) behind the rupee decline.

Fundamentally there are two sides to this problem - an external & an internal side. External factors include state of the global economy, policy changes of major trading partners and direction of major currencies in the world. Internal factors to look at are domestic policies, economic reforms, local consumption pattern and value of domestic assets. It helps to focus on the downhill period of the Indian economy from 2007 to 2013.

What happened globally between 2007 and now (Aug-2013)?

1. Lehman brothers collapse in Oct 2008 leading to a major Financial crisis
2. World over government bailouts totaling $20trillion to rescue banks, insurance companies and bond holders
3. Printing of money by US Fed through Quantitative Easing (QE1, QE2 & QE3)
4. Balance sheet of US Fed increasing 4x from $865bn to $3.6Tn while keeping long term interest rates near 0%
5. The central banks of UK, Eurozone & Japan following easy money printing boosting their balance sheets 2-4x
6. Major currencies devalued against each other to make their debts cheaper & exports competitive (otherwise known as currency war)
7. Cheap money flowing into Emerging markets via Equities, Bonds and Real estate
8. Slush easy money creating asset bubbles particularly in Emerging markets like India
9. Oil price increases by 41% (in $ terms)
10. Gold price increases by 2.15x (in $ terms)

And the world quickly returning to the 2007 formula of chasing short term returns instead of fixing long term issues. This is evident from the all time low price of commodities which are needed to produce real value. Once QE tapering commences, all easy money is expected to flow out of emerging markets back to the US to re-adjust Fed's balance sheet, leaving emerging economies poorer and more indebted with asset bubble bursts & high inflation.

What happened locally between 2007 and now (Aug-2013)?

1. CPI, the measure of inflation increases by 80% (~10.29% p.a)
2. Oil/Petrol price increases by 70% (in Rupee terms)
3. Gold price increases by 3.11x (in Rupee terms)
4. GDP shrinks from 9.32% to 5%
5. Trade deficit goes up from $80bn to $800bn
6. CAD (Current Account Deficit) widens from -0.7% to -4.8%
7. Fiscal deficit widens from -0.5% to -4.8%
8. External debt increases by 74% from $224bn to $390bn
9. Unemployment rate increases by 2.2%
10. And scams rise to Rs.15.38Lac crores (~$250bn)

India's fiscal deficit rose sharply from 0.5% to 4.9% in 2009 due to various stimulus packages given during the 2008 financial crisis. Ever since the fiscal deficit has stayed at highs of 3.7%-5%. Mismanagement of revenue and wasteful spending has led to fiscal profligacy resulting in borrowing of cheap foreign debt to spend for domestic populist measures. Along with policy drags in infrastructure, coal and power, the economy practically stalled with a net result of producing less and importing more. Weak global factors combined with weak domestic factors have been a double whammy sending the rupee on a free fall!