The Indian rupee has not had a good war. It was worth 90.95 to the dollar when USA and Israel they started bombing Iran on February 28. By the end of March, it had fallen 4%, to 94.65; The euro and the pound, on the other hand, had only fallen by approximately 1%. This comes on top of the 5% the rupee fell last year, when Donald Trump’s punitive tariffs and a weak domestic market helped make it the worst-performing currency in Asia. It will likely fluctuate both ways in the coming days, as traders assimilate the new rules of the central bank that seek to strengthen it, or Mr. Trump changes his mind about his war, but the trajectory is clear. Every week in March, and frequently last year, newspapers published articles with the now familiar words “record low.” People want who to blame.
“The weakness of the rupee is due to many factors, some of which have to do with domestic politics.” So why hold whoever is in power responsible for the weakness of the rupee?
One of the reasons is that Narendra Modi It has conditioned Indians to think that way. The rupee lost almost a fifth of its value in 2013, when high inflation and the country’s large current account deficit made it particularly vulnerable to policy changes in the United States, which unsettled investors around the world. Modi, then the state leader with his sights set on the premiership, made incendiary speeches denouncing the government of the day, led by the Congress Partyas responsible for the collapse. “This is not just because of economic reasons,” he once thundered, but “because of the corrupt politics of Delhi.” Other leaders of his Bharatiya Janata Party (BJP) They amplified the message.
Mr. Modi is a shrewd strategist who knew exactly what he was doing. He Congress he was deeply unpopular and beset by accusations of corruption. Furthermore, the India has idealized the rupee ever since it took the reins of its own destiny after independence. A strong currency has long been considered “a matter of international prestige,” writes Srijan Shukla of the Observer Research Foundationa study center. Mr. Modi’s insight was to see how he could profit by politicizing this obsession. Opposition politicians are now relishing the opportunity to give him a taste of his own medicine.
“The event that cemented in the minds of Indians the connection between the rupee and the country’s international standing took place in 1991.” When India’s leaders opened their economy that year, they did so under pressure. A balance of payments crisis, aggravated by the war in Middle East and the dizzying rise in oil prices, left barely enough foreign currency to cover two weeks of imports. The government committed almost 50 tons of gold to overcome the crisis. What in the country was equivalent to pawning the family jewels, was seen internally as a collective humiliation. The currency was then devalued by 9% and, two days later, another 11%, which was a new blow to the Indian economy.
The reforms that followed the 1991 crisis led to the India towards prosperity. Today, its economy is robust and resilient. The risk of another balance of payments crisis is low: the India It has some of the largest foreign exchange reserves in the world, enough to cover almost a year of imports. However, the trauma of 1991 has left a deep mark on the national consciousness, which is transmitted from generation to generation. For many, the sharp depreciation of the currency is inseparable from the shame of that period.
The current depreciation will have real repercussions, affecting prices of everything from energy and consumer goods to government subsidies (although it will also make the company’s exports cheaper). India). High oil prices and a weak rupee constitute a double threat: bad economic news, but politically manageable. However, there is a scenario that should worry the government. If the war is prolonged, the rupee will reach the psychological level of 100 to the dollar. Even if the fighting stops tomorrow, persistently high energy prices—coupled with structural weakness in the Indian currency—will inevitably push the rupee closer to triple digits. The central bank will try to prevent this, but there are limits.
The Lord Modi does not support the war against Iran. But he has also not prepared his nation for what could still be to come. This is a rare miscalculation by a man who understands better than anyone the passions aroused by the fall of the rupee.
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