India’s prime minister knows the risks of a weak currency
Illustration: Lan Truong
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T HE INDIAN rupee has not had a good war. It was worth 90.95 to the dollar when America and Israel started bombing Iran on February 28th. By the end of March it had fallen by 4%, to 94.65; the euro and the pound, by contrast, was down only 1% or so. That comes on top of the 5% the rupee declined last year, when Donald Trump’s punitive tariffs and a weak domestic market helped make it Asia’s worst-performing currency. It will probably swing both ways in the coming days as traders digest new rules from the central bank that aim to strengthen it, or Mr Trump changes his mind about his war, but the trajectory is clear. Each week in March, and frequently last year, newspapers ran stories with the now-familiar words “record low”. People want someone to blame.
Indians are unusually attentive to the value of their currency. Such vigilance is not uncommon in economically maladministered countries like Turkey. Even advanced economies’ currencies can take on a political hue, as in post-Brexit Britain. But India has stable governance, modest inflation, ample foreign reserves and consistently high growth. The rupee’s weakness is caused by many factors, only some of which have to do with domestic policy. So why hold whoever is in power responsible for a weak rupee?
One reason is that Narendra Modi has trained Indians to think that way. The rupee lost nearly a fifth of its value in 2013, when the country’s high inflation and wide current-account deficit left it particularly vulnerable to policy changes in America that spooked investors worldwide. Mr Modi, then a state leader with his eye on the top job, delivered fiery speeches denouncing the Congress Party-led government of the day for the collapse. “This is not just for economic reasons,” he thundered in one outing, but “because of the corrupt politics of Delhi.” Fellow leaders of his Bharatiya Janata Party (BJP) amplified the message.
Mr Modi is an astute tactician who knew exactly what he was doing. Congress was deeply unpopular and beset by allegations of corruption. And India has fetishised the rupee ever since it took control of its own destiny at independence. A strong currency has long been seen as “a matter of international prestige”, writes Srijan Shukla of the Observer Research Foundation, a think-tank. Mr Modi’s insight was to see how he could gain by politicising the fixation. Opposition politicians are now relishing the chance to give him a taste of his own medicine.
The event that first cemented in Indians’ minds the connection between the rupee and the country’s international standing came in 1991. When India’s leaders opened up its economy that year they did so under duress. A balance-of-payments crisis, worsened by war in the Middle East and surging oil prices, left just enough foreign exchange to cover two weeks of imports. The government pledged nearly 50 tonnes of gold to help tide itself over. The national equivalent of pawning the family jewels, it was seen domestically as a collective loss of face. The currency was then devalued by 9% and, two days later, another 11%, heaping insult upon insult.
The reforms that followed the crisis of 1991 set India on the path to prosperity. Today it is a robust, resilient economy. The risk of another balance-of-payments crisis is low: India has some of the largest foreign reserves in the world, enough to cover nearly a year of imports. Yet the trauma of 1991 has scarred the national psyche, passing from one generation to the next. A sharply falling currency is, for many, inseparable from the shame of that period.
The current bout of depreciation will have real-world effects, affecting the prices of everything from energy to consumer goods to the government’s subsidy bills (though it will also make India’s exports cheaper). High oil prices and a weak rupee are a double whammy, bad news economically but manageable politically. There is, however, a scenario that should unnerve the government. If the war drags on, the rupee will hit the psychological level of 100 to the greenback. Even if the fighting stops tomorrow, lingering elevated energy prices—plus the structural weakness of India’s currency—will inevitably see the rupee flirt with triple digits. The central bank will try to prevent that from happening, but there are limits.
Mr Modi is no supporter of the Iran war. But nor has he prepared his nation for what might still be to come. It is a rare miscalculation by a man who understands better than anyone the passions aroused by a falling rupee.■