Why Indian Rupee is falling down? India has biggest gold reserve in the world. What's wrong with the economy of India?
Gold holdings are in private hands and not on RBI’s balance sheet. The central bank holds around 600B in reserves comprising of gold and foreign exchange to finance imports.
Since the country does not generate export surpluses, reserves are composed of foreign fund flows from FDIs, FIIs, sovereign & commercial borrowings, NRI remittances, etc.
There are a few key reasons why the Indian rupee is falling in value despite India having large gold reserves:
Widening trade deficit - India imports far more than it exports, resulting in more demand for foreign currency like dollars to pay for imports. This strengthens the dollar relative to the rupee.
Foreign fund outflows - Foreign investors have been withdrawing money from India's capital markets due to global uncertainty, putting downward pressure on the rupee.
High inflation and interest rates - India's high inflation and RBI rate hikes to combat it have contributed to the rupee's decline. High rates can dampen economic growth.
Surging oil prices - As an oil importing country, high global crude prices severely impact India's import bill and trade imbalance.
Geopolitical tensions - Global conflicts like the Russia-Ukraine war contribute to elevated oil prices and risk-off sentiment that weakens emerging market currencies like the rupee.
Strong US dollar - The flight to safety has strengthened the US dollar index considerably, weighing down currencies of develo countries.
While India has sizable gold reserves, these have limited impact in influencing currency fluctuations in modern economies driven by complex factors like trade flows, capital movements, and differences in interest rates and inflation. The rupee's slide indicates India's current macroeconomic challenges outweighing the benefits of gold reserves.
Fundamental domestic reforms and progressive economic policies are needed to spur growth, attract investment, boost exports and restore stability to the Indian rupee over the long-term.
Krishnan Unni Madathil
India doesn’t have the biggest gold reserve in the world. That title goes to the US. The US dollar has been rising due to rising interest rates which is pushing all other currencies including INR down. The USD competes with gold for influence; and rising price of USD means that funds from across the globe will make a beeline for the USD assets.
The only way for INR to strengthen is to make India and assets in India more fairly valued by the world so that people can trust the INR more as a store of value.
Inflation is a common phenomena and all countries suffer from this.Every family has increased income and reduced value of currency.
Check out India's gold reserve below
It isn't the largest gold reserve.
Now look at India’s important export numbers below
We have a huge negative balance of trade.
How can you expect the value of INR to be stable in FX markets. We have a long history of a negative balance of payments.
The economy of India has no connection with the value of INR in FX marketd.
The economy of a country is measured by its GDP.
Our GDP is growing. Growing better than developed countries.
The economy of any country depends on two things.
The productivity of the citizens of the country
The amount of money invested as capital in businesses in the country by entrepreneurs.
We have a poor productivity. 70% of India lives in the rural hinterland but contribute to just 17% of the GDP.
These 70% people don't care about formal education. They don't consume any manufactured goods. They have the potential to grow but they are in a zone of comfort as India is an excellent place for agriculture - specially the indus - ganges - btamhaputra river Valley.
In the current Globalized world, disruption/discontinuity of any nature impacting the ecosystem has adverse impact on the economic front. The rupee has been on the decline since early this year. The rupee is falling mainly due to high crude oil prices, a strong dollar overseas, and foreign capital outflows. These factors are making the dollar more attractive and the rupee riskier for investors.
Is Indian rupee backed by gold?
Today no cureency in the wirld is backed by gold.
Gold backing needs 50 % gold in value as compared to the notes printed by the government. While the currency in circulation is itself around ₹ 22 trn for india. While this itself will require some 8000 tons of gold to back it. India has hardly a thousand tonnes of gold. Or equivalent of 6% . As per wikipedia it is just 618 tonnes.
The gold reserves are just very small and the currency remains floating. The currency value is no way connected to gold reserves today.
The currency value is rarely an indicator of the gold reserves. The most indebted country in the world is USA with a very large proportion of debt as external debt.
But it's currency is so called world currency. It may loose that status in near future. It's gold reserves are not even 5 % of the external debt at current price of gold. Still so many countries hold that currency as a reserve as against gold.
These calculations are just for sake of understanding. There is much more to it than presented here.
But Indians have a very large holdings of gold as compared to it's central bank.
Our mandirs are far richer than the RBI in terms of gold. While indians swallow as much as 800 tons of gold per year during various seasons. (Excluding the jwellary export)
Indians will be least affected if the global currency crashes or is changed to some gold backed currency.
Is the rupee devaluation a help to the Indian economy?
DEVALUATION simply means to make your currency lower than other currencies.
Effects of RUPEE devaluation :-
As the currency is devalued, it’s exports will rise as the importers from other countries will have to pay less. It will boost our IT exports, pharmaceutical and handicraft exports.
For ex. :-
Suppose the price of pharmaceutical product is Rs 100.
Earlier 1 $ = 100 Rs.
Now 1$ = 110 Rs.
So, if the trader want 10 pharmaceutical product earlier it used to coast 10$ but now it will cost 9.09$. So, saving for the trader. As, a result he will import more from us because it is costing him less.
But since INDIA is an import dominated country, who has it’s CAD always negative or we can say in deficit. Devaluation has more negative effects then positive.
2- IMPORTS :-
The import will rise as the value of currency falls, as a result increasing our CAD.
For ex. :-
Earlier 1$ = 100 Rs.
Now 1$ = 110 Rs.
Let’s take example of OIL. It’s the most imported product of our country.
So, Cost of 1 Barrel of OIL = $50 ( Rs. 5000) earlier
Now after Rs. devaluation the same will cost Rs. 5500.
Thus, it can be understood what impact the devaluation will have on our country, as we are importers.
3- HIGHER INFLATION :-
A weak rupee will increase the burden of Oil Marketing Companies (OMCs) and this will surely be passed on to the consumers as the companies are allowed to do so following deregulation of petrol and partial deregulation of diesel. If the OMCs increase fuel prices, there will be a substantial increase in overall cost of transportation which will stoke up inflation. As, we know how important is OIL for our economy because a substantial increase in the price of oil can increase inflation to higher level.
4- TRAVEL AND OVERSEAS EDUCATION :-
As price will be devalued so the cost of travelling to other countries will also increase and to study in foreign countries will also become more expensive.
We will take another example for that :-
Fees of STANFORD for M.B.A is $ 200,000 = Rs. 2,00,00,000 (Taken 1 $ = 100 Rs)
Now when the currency is devalued it wil cost Rs. 2,20,00,000.
A increase of Rs. 20 lakhs. You can imagine the effects.
斯坦福大学MBA的学费是20万美元= 2000万卢比(取1美元= 100卢比)
All in all, a weaker rupee will reignite inflation. Thus, it can be said that devaluing currency in terms of INDIAN context does little good and more harm.