The Causes of Indian Rupee's Depreciation vs Dollar --- III

A few days ago, a Chief Minister of a state, whose only agenda is development,made a revealation to his adoring  followers, regarding the depreciation of the rupee against the dollar. He said the reason  was because there was corruption in the Delhi Sultanate. By this logic, there is widespread corruption in all the countries of the world, as all currencies are depreciating against the dollar. The only exception is USA, as its currency is dollar and it does not depreciate against itself.

It is a well known fact, that whenever there is global recession, the dollar flows back into USA. There, it is invested in bonds, a safe way of hedging till the global markets come out of recession. No longer, are the major investors, interested in investing in various equity markets, as they rightly see a fall, in the value of dollar in local currencies, affecting their yields and net value on exchange conversion. 

This creates a global shortage of dollars. As is well known, the price of a commodity in short supply, goes up. Thus, more of local currencies have to be shelled out to buy the dollar. In other words, the local currencies start depreciating and the dollar gets appreciated. 

Thus, the currency depreciation is a worldwide phenomenon, caused by parallel fall in demand for goods and services, in almost all the countries of the world. In fact the economies of some leading countries start to contract. The advanced markets of countries like USA, Canada, France, Germany, Japan,UK, and few others are the demand drivers of the world economy. The countries like India, China, Thailand, etc fulfill this demand. In this manner all countries benefit. The advanced countries get goods and services at relatively cheaper prices and supplying countries get enriched, by earning dollars.

However when the advanced countries, due to a variety of reasons, find themselves in economic recession, leading to contraction in demand, it adversely affects the economies of supplying countries like India. Not only their exports fall but the invested dollars in equity markets  also get withdrawn, leading to a shortage of dollars. To meet its import requirements, of crude and other raw materials for its industries, dollars are required. But the dollars have already been repatriated in large sums to USA and invested in bonds. This leads to the rupee's depreciation and continues till the economies of the advanced countries improve and demand starts building up again. When this will happen, is anybody's guess. 

However it is important that India should use the depreciated rupee to its advantage, by encouraging increased exports, due to increased competivity. New markets need to be developed. Payment methods and credit cycles need to be reworked.

The only solace is that, there is nothing greatly wrong with our economy. India is also suffering, due to global recession, like all other countries and has to take necessary steps to come out of it. It also has to wait for the recession cycle to come to an end in due course of time.

Corruption was equally the same, when the the dollar was worthy Rs 45 and the GDP was growing at the rate of 8.5%+, as it is today. So corruption as a reason for devaluation of rupee can be, perhaps, safely ruled out.