Andar – Bahar Story of Indian Rupee

It feels like pinched when I hear about the devaluation of rupee in the international market against the US dollar. From past 6-8 months the rupee value is considerably falling day by day. It is a matter of great concern for Indian economy and common man's monthly budget on the long run (in fact already it is). What is meant by devaluation? What is the history of devaluation in India? How it is being determined? What causes the devaluation? What is the Andar – Bahar Story of Indian Rupee? What is the possible way out of this constantly biting big concern?

What is devaluation of money?

A substantial drop in the value of a currency, relative to the price of gold or the currencies of other countries is called devaluation. What does this mean? That means the reduction in the purchasing power of a currency. For e.g. If the US $1 = Re. 1 then the purchasing power of both the currency is same. I can buy 1 Kg of sugar buy paying either Re 1 or $ 1 (if the 1 Kg sugar price is Re 1). But when the devaluation in either of these currencies occurs then the purchasing power of that currency will be reduced against the other currency. Say rupee value is devaluated by 10% due many reasons in the investor market and in the import - export, domestic demands, in this case, we have to pay Re. 1.10 to buy 1 Kg of sugar. (Note: There are lot of factors determine the devaluation of currency.)

What is the History of Devaluation of Currency in India?

After the independence of India, during 1947, 1 Indian Rupee = 1 US dollar. Since then India had 2 major economic crises. One during 1960 and another 1991.

Foreign loot in India for more than 200 years left India in a condition where socio-economic condition were worst. Society was divided into smaller section based on caste, religion and economical variations. Economic condition was too bad, where the poverty was the first thing the Indian government had to tackle on a priority.

1966 Crisis

Since independence, India continuously ran into trade deficit till 1960. Trade deficit is a term used for a condition where imports are higher than the exports. Even the Indian budget ran into deficit budget. Government could not raise funds neither from the private sector nor from abroad. As a result even the Government took few decisions like issuing bonds to RBI, but could not attract more funds for longer duration. In this condition the foreign countries advised India to devaluate its rupee value and liberalize the trade to get the funds flow in India. Good part is Indian government did not yield much to foreign pressure, but, bad part is, it did not take any measures to avert it completely by rising internal capital. Even the Indo-Pak war of 1965 and 1965-1966 draught also contributed considerably to devaluate the Indian Rupee value.

1991 Crisis

India started having balance of payments problems again since 1985, and by the end of 1990, it found itself in serious economic trouble. The government was close to default and its foreign exchange reserves had dried up to the point that India could barely finance three weeks’ worth of imports. As in 1966, India faced high inflation and large government budget deficits. This led the government to devalue the rupee.

Till 1991 India had still fixed exchange rate (non-fluctuating based on market fluctuations). It was not changing based on the market fluctuations. In 1991 India moved from fixed exchange rate to overcome the deficit and exchange reserves issues, Indian government had been forced by the developed economies as well as by the world monitory reserves. At the end of 1991, the Indian Rupee was devalued considerably, which was close to 100%. It was $1 = INR 17.5 during 1990 immediately it became $1 = INR 35 in 1991. The market was opened for free trade. Liberalization of trade and Globalization of markets took over the Indian market. Now, at the end of 1999, the Indian Rupee was devalued considerably.

The effect of this was un imaginable. If we had borrowed 1 lakh from another country in 1990 then we were supposed to pay $ 2 lakh in return, without any reason. In the name of attracting foreign investment though Liberalization and Globalization, We had to pay more money for our debts under covers.

The government defends its decision about Liberalizing the Indian markets by saying there was no other go than adopting it to overcome the economical downturn developmental saturation. At that moment that decision might be true but, that situation did not arrive all of a sudden. There are several reasons which contributed to it. Let us discuss few of them.

Too Much Dependency on Foreign Investment

We know India is a developing country. We cannot act stiff while dealing with developed countries while taking decisions related to foreign policies, trade dealings, market expansions, etc. We being always a borrowing country, we do not have the privilege to take decisions in our favour. We have to depend on other countries as well. But, it doesn’t mean that we have to surrender our economical sovereignty to attract some investment or capital from these countries. Till today, whichever party came into power in India, all of them miserably failed to convert the internal savings into profitable capital (as basement) providing facilities and confidence to the entrepreneur. In fact, nobody has a will.

Indian government borrowed loan for the first time in 1950 and then it continued to borrow every five years. Then from 1985 onwards it borrows loan from IMF, World Bank and other developed countries in the name of developmental works. Even the state governments as well directly deal with foreign nations for the developmental works in their state.

Within 30-40 years after fighting back the East India Company, we started giving a red carpet welcome to the same multinationals. The central and state governments compete with each other to see who will attract more foreign investors. What is this mad race? We consider the dollar (as most of the trade happens in this currency) is God. If some one come and invest 20-30 thousand dollar and loot millions of dollar/rupees from within our country, it is not a matter of concern for Indian government. We should understand one thing clearly that no foreign investment comes without any changes in the policy to favour their interests. The recent Foreign Direct Investment in retail market bill is a latest example of this.

The initial considerable devaluation of money was to overcome the trade deficit and foreign exchange reserves and now the floating exchange rate, which is mainly decided by the share market. There are 2 external major market players contributing to the depreciation of Indian Rupee.

Foreign Institutional Investors (FII)

An investor or investment fund that is from a registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds.

Whenever there is a capitaloutflow caused by the FII’s the demand for Indian Rupee fall down, which results in the depreciation of Indian Rupee. Rough estimates suggest that FIIs pulled out approximately $500 million since November 15, 2011 from India. Why the FIIs move from market. It depends on their interest. When they feel they are making good profit they pullout the money and when the demand for the shares fall, again they invest. In this big game the looser is Indian market and the local investors. This is how the money moves out from India legally.

The Reserve Bank of India (RBI) or Securities Exchange Board of India (SEBI) cannot control this outflow of wealth. Even they cannot trace who is involved in this. Because, as part FDI in investment rule of India the FIIs can directly invest in Indian Stock Market, after their registration with SEBI.

Participatory Notes (P-Notes)

P-Notes are the very important instrument, which plays an important role in fluctuation of currency. The P-Notes are the instruments (receipt) issued by the FIIs to the foreign investors (could be individual or an institution) to confirm that we have received this amount, who do not want to get registered with SEBI. This is very risky. Neither SEBI nor RBI has any control over these anonymous investors. This all happens in the name of FDI. It is a game where the country in which the money is invested is going to lose its hard earned money, savings, and capital.

In India where to open a bank account also we need to give all our personal details but here while investing in the market (while issuing P-Notes) relatively lenient.

In other words P-Notes are financial instruments used by investors that are not registered with the SEBI to invest in Indian securities. Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. It’s day light loot under custodian of Indian government.

It is the reason why so called Indian financial regulators or monitors do not know the details of such investors, due to which they cannot even take action on such players. Many a times SEBI found that few companies buy their own shares through P-Notes to evade tax. There are lot of consideration happened to stop or tighten the rules for issuing P-Notes, but till date no constructive action is being taken towards banning it by Indian government.

FII and P-Notes may increase money for short period in the market but in the long run they paralyse the Indian stock market and rob the small investors.

Mauritius Route

Many of us have heard about a lobby against government to bring a strong legislation called Beneficiary Ownership Declaration (BOD) for foreign investment in recent past. It is nothing but to know the owner of the end/foreign investor who is investing in our market. By knowing the beneficiary we can have a better control on in flow and outflow of money into Indian market.

The Indian black money owners in foreign banks started fearing about the movements in India against corruption in recent past. They started feeling that they might lose their (hard earned) money. Then they found this Mauritius Route as a safe option to convert their black money into white. How?

There is treaty exist between Mauritius and India called Double Taxation Avoidance Treaty (DTAT) since 1982. according to this treaty the capital gains/profits made by the residents of Mauritius through sales of shares in India will not be taxed in India rather it will be taxed in Mauritius, where the Capital Gain Tax in Mauritius is nil or maximum 5%. So, this attaracted the tax evaders, industrialists and black money holders to invest through Mauritius.  In 1992 when the FIIs were allowed in India same year even Mauritius passed Offshore Business activities Act which allowed the foreign companies to register there for investing in India.

Mauritius is not worried about the source of the investment. These Indian Swiss account holders open a company in Mauritius and then through it invest their black money into Indian market under FII, and take the white profit with them. Not only politicians celebrities do this but, in fact, the industrialists and entrepreneurs also started making their business though this easy technique. This is to be called as vicious circle of patronisation. How? The owners of the company or top management will be having major shares in their hand. When their company’s share value reaches a certain height then they pull the shares with good profit and invest again when the share value is low. Professionals call them as intelligent or market masters, but, people like me call them suckers. Because in theior game loosers are individual investors.

Heavy Taxation

Heavy taxation is also an indirect contributor in deciding fall and raise of Indian rupee. When most of the money is collected from an individual or firm in terms of tax, out of which high percentage of money is not invested on developmental works, rather it flows out into pockets through the hole of corruption.

Another thing is general public develop mentality of escaping tax. Because, they feel the money paid is used neither for his area development nor nation building. Then the internal money begins to convert into black money. Then as if both (internal black money owners and external black money owners) have an understanding, they don’t question each other. If the national money is not handy for its own people then the devaluation is inevitable because we have beg again before other countries. They ask to devaluate. The only sad thing here is, people in higher positions, policy makers also beleive that dollar is God.

Moral Corruption

As everyone knows corruption plays a vital role in deciding the growth of a country. The money looted though the means of corruption never benefits the national growth. It is all still their because of continuation of British Rule. Whoever raises their voice will be suppressed. There is lack of political and social will to change this. Countryside people are fighting to meet their daily needs and urban people are struggling to fulfil their dreams, desires and wants. Above there is one more cult which feels happy when the rupee fall. Things in the society might change in fraction of seconds, but, whereas change in individual’s will take generations.

According to them, India will never grow; mentality of people here won’t change ever. Then why not I conentrate on myself, my growth?

Unless the uncertain fluctuation exists in the economy there is no way out from inflation, poverty, social injustice. Every section of society will be in illusionary happiness. If this loot in the form of corruption, FII, FDI, etc continues and we keep silent then it might happen one day that India becomes subsidiary country of so and so country (like software companies)... I hope that we as a nation act before that.


- K. Kalyan