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The Wailing Rupee

Author: Administrator Account/Wednesday, February 24, 2010/Categories: Currency

The Wailing Rupee

I was born on August 20, 2012, just over a year ago. Right from Day One, my life has been a rollicking affair. There were some ups, but the downs were dominant. The past three months were exceptionally bad. I was debased. Unlike humans and other beasts, you can quantify my debasement. That figure stands at 15%, and rising rapidly. Against the US dollar, I did grow stronger a few times, but weakness has been my general state. Yes, you may have guessed it right. I am the Rs 1,000 note, a.k.a the Big Mahatma, which the Indian government minted last year and subsequently entered the RBI vaults.
 Even as I made my way to the RBI, controversy erupted over the credibility of my siblings and smaller cousins, i.e. the millions of other Rs 1,000 note as well as those of other denominations. Three days after I was born, the RBI – my parent, mentor, guide, philosopher, teacher, employer, owner, etc – released its 2011-12 annual report. In it, the central bank stated that it had compulsorily decided to use note-sorting machines to identify counterfeits and improve data related to their circulation.
 The RBI’s monetary policy statement (2012-13) “stressed on how the existing detection and reporting of counterfeit notes by banks are critically important prerequisites for assessing the dimensions of counterfeit notes in the system.” For the past decade and a half, the Indian monetary system has been rocked by fake currency notes, mostly in the higher denominations of Rs 500 and recently the Rs 1,000.
 A recent study by the RBI found that based on the number of such notes detected by banks, counterfeits in the higher denominations bracket comprised around 18 notes per million pieces a year between 2008 and 2012. On an overall basis, the figure was much lower, around 7-8 pieces per million. Based on these figures, fakes seem to be an unusually small issue but, as the study pointed out, “by examining the data on counterfeiting reported through the banking channels, one can assess the threat to some extent; but quantitatively it could be an underestimate of the reality.”
 Just a few weeks ago, Namo Narain Meena, the minister of state for finance, told the Parliament that my illicit body doubles were being injected into India through land, sea and air routes over the Indo-Pak border, as well as from neighbouring countries such as Nepal, Bangladesh, and Sri Lanka. Meena added that the origins of my likenesses lay in UAE, Thailand, Malaysia and Vietnam. The moderate rise in the circulation of these notes in the past three years, he said, was aimed to destabilize the already-faltering Indian economy, and finance militant activities.
 However, to be frank, fakes were the least of my concerns in those first few weeks. My immediate fear was domestic devaluation, i.e. due to inflation and price rise. In August 2012, the wholesale price index (WPI) was up 8% and the consumer price indices (CPI) for different categories of earners were between 9% and 10%. The prices of food and fuel items had skyrocketed, and the urban middle class and lower classes were exasperated by government’s inefficiency at controlling prices. Over the next few months in the second half of 2012, WPI, on a monthly basis soared by an average of 7% compared to the same month the previous year.
 Inflation was either above the acceptable norms, or hovered at the outer limits. In early 2013, a reference note prepared by the Lok Sabha Secretariat for use by the country’s Parliamentarians noted that various committees had given different acceptable limits of WPI inflation. The Chakravarty Committee pegged the figure at 4%, Tarapore Committee at a lower 3%, and the Rangarajan Committee at a higher 6%. It concluded that the “acceptable range of inflation in India lies between 3-7%.”
 The reasons that this reference note gave for high WPI and CPI inflation were several such as weather and monsoons, minimum support prices for various crops, government policies, substitute products, demand and supply curve, seasonal cycles and international commodity prices. It stated that during 2011-12, or almost five months before I was born, “the financial year started with a headline inflation of 9.7% which briefly touched double digit in September 2011 before coming down to 6.6% in January 2012. The increase was driven by a host of factors that included an increase in food prices, a revision in the administered prices of fuel as well as an increase in manufactured product prices….”
 Only now, over the past few months, inflation was reined in and, in May 2013 touched the lowest level in the past three years. However, the WPI has begun to rise again the past few weeks but, good monsoons and higher agricultural production in the near future should curb inflation to 4-5%. There still are huge spikes in certain products; for instance, the price of onions, which have spelt political disasters for several ruling regimes in the past, shot up to Rs 80/kg in New Delhi.
 Even as I breathed a sigh a relief at the thought of low inflation in May 2013, our family was rocked by the external exchange rate volatility. It was in the making for almost a year, but we never expected it to depreciate so rapidly and seamlessly against the US dollar. My parent’s former governor did not have a clue on how to arrest the devaluation; the finance ministry’s hands seemed totally tied and it seemed to be caught in a policy uncertainty.
 Before I get into the reasons why I went weak against the dollar, let me give you a few clues on what happened to my exchange value in the past 12 months. The day I was born, the rupee was valued Rs 55.54 to the dollar. The situation remained the same for around three months and, then, almost magically, my state recovered. On October 5, 2012, the rupee was valued at less than 52 to the dollar. By the end of the year, during the month of December 2012, it was around the Rs 55 mark.
 In early February 2013, the currency was again under Rs 53. It stabilized between Rs 53-55 for the next few months. The real slide started in June 2013, when the value crossed the Rs 60 mark on 27th of the month. Then, in August, was breached the Rs 62 mark, just a day before my first birthday. Experts contended that the rupee could soon breach Rs 65 and go down even further. There is simply no stopping my devaluation.
 The reason for my fall was simple; the government’s current account deficit (CAD) was way too high for anyone’s comfort. As a percentage of the GDP, between 1990, when the foreign exchange crisis forced India to opt for a huge IMF loan and kick in economic reforms, and 2010, CAD has always been under negative 3%. This meant that although CAD was negative, i.e. India spent more foreign exchange than what it earned, in most years it was still in control and never crossed -3%.
 However, the situation changed dramatically in 2011, 12 and 13 (until August). In the first two years mentioned, CAD as a percentage of GDP was a negative 4.2% and negative 4.8%, respectively. The trend has worsened this year. More importantly, there are no options with the RBI or the government to curtail CAD. All that the government has done is to tighten gold imports and make them more expensive, curb imports of a few consumer goods, and attempt to increase dollar flows.
 In fact, the government reasoned that my fall against the dollar was not unusual; other currencies in emerging and developed markets had shown similar CAD and exchange rate trends. A recent monthly bulletin of the RBI argued that among eight such nations, which included Russia, Brazil, South Korea and South Africa, but not China, five including India showed a negative CAD to GDP ratio.
 India was the third worst among the above five nations, behind South Africa and Turkey. But in terms of exchange rate falls, India was the second worst performer after Brazil whose CAD to GDP ratio was much lower than India’s. The fact is that all the currencies of these eight nations had depreciated; even the ones of the three nations – the Philippines, South Korea and Russia – which had positive CAD to GDP ratios.
 So, there I am. Threatened by impostors, shaken up by domestic inflation and, now, quaked by exchange rate fluctuations. I wish if someone would just tear me apart and soil me so that I could be taken out of circulation. Of course, death is still not guaranteed. Last I heard, the RBI has decided not to accept soiled notes. And the banks are anyway not interested in soiled notes or even new and fake notes these days. My usefulness to my bearer diminishes by the minute. There is consolation, however.
Every time I fall, the aam aadmi grieves for me. 

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