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India: Rupee depreciation

Rupee's Kismat Konnection

 

Trends show it has depreciated before most general elections
AMIR HOSSAIN | Issue Dated: November 30, -0001, New Delhi
Tags : Indian Rupee | USD | 2014 Lok Sabha polls | Ratan Tata |
 

Recently, Tata Group Chairman Ratan Tata expressed his concern over the country's distressed economy. He said: “We have lost the confidence of the world. The government has been slow to recognise that.” Apparently, India’s economy has been derailed and its growth rate has plunged to 4.4% in the April-June quarter this year, which is a decade's low. Consumer price inflation is currently around 10% and escalating. In addition to that, the rupee plunged to a record low of 68.75 per dollar a few days ago. Consequently, many recent surveys have found that India is fast losing its sheen as a promising destination for investment and business.

Several factors like the slowing economy, rising inflation, around 5% fiscal deficit and a high current account deficit, have been blamed for the rupee depreciation. However, there is another reason is thriving in the picture. Historical data reveals that there is a certain connection between rupee depreciation and general elections. In most general election years except 2004, the rupee depreciated against the dollar. An article titled “What’s the connection?” published recently in The Hindu Business Line clearly highlights the fall or rise of the rupee in subsequent election years.

According to this article, the pattern of rupee depreciation in election years has been well documented. The statistics speak for themselves. “1984 – down 21%; 1989 – down 24%; 1991 – down 22%; 1996 – down 19%; 1998 – down 13%; 1999 – down 14%; 2004 – up 14%; 2009 – down 25%; 2013 (till now) – down 20%.” Keeping in mind that the next general election is due next year, the depreciation of the rupee is hardly surprising.

All the evidence pointing to the nature of the rupee's depreciation bears out one thing strongly: that the value of a rupee falls whenever a general election is around the corner. History also reveals that rupee has stabilised after the elections. For instance, rupee plunged to Rs. 50 from Rs. 39 against the dollar between January 2008 and May 2009. After the elections in May 2009, the rupee appreciated to Rs. 44.

Some explanations as to why the rupee depreciates before elections. Economists like to explain this phenomenon this way: every government is inclined to spend extra money to satisfy vote banks before an election. So this unproductive expenditure highly influences the rupee to depreciate, forcing the government to intervene to notch up its value.

Similarly,  the political class starts to bring back its money hidden in foreign lands to fund elections. Due to the weak rupee, they would like to get a higher price for the same amount. That explains why governments like to put on a show of confidence that there is nothing seriously wrong with the plumetting value of the rupee, which is just a transitory phase of volatility that will surely pass off with time. How true is that? 
 

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Issue Dated: Feb 5, 2017