Mr Jaitley is right. The fact that the rupee is slipping gradually and has become one of the worst performing Asian currencies is not the Bharatiya Janata Party’s fault (at least not entirely) – the causes are international. Revisiting the policy measures taken after the 2008 financial crisis by the United States and India makes us realise that this slide in the value of the rupee today was imminent, if not inevitable.

First things first. We are not alone in this slump. As a matter of fact, all emerging market economies are facing a downward journey including Argentina, Brazil, South Africa, Russia and Turkey. Turkey has been among the worst-hit so far with the Turkish lira falling more than 19 per cent in value over the past few months.

The beginning of the trouble dates back to the 2008 financial crisis (like so many other troubles) when in an attempt to recover from the devastated economy, the United States along with major European economies like France and Germany decided to keep their interest rates close to or below zero. The relatively low-interest rates were aimed at attracting borrowers, particularly from the emerging economies and they worked. Emerging economies such as ours and Indonesia’s borrowed big from the US. As a result, the emerging markets enjoyed phenomenal growth in the last decade at a fraction of the cost of what it would have been, had the 2008 financial crash not occurred.

Cut to 2018 – most of our external borrowing is now in dollars. Since 2017, the US economy has begun an upward journey with the growth rates surging above 3.5 per cent after a very long time and the yield of US bonds favouring investors. The dollar is now getting stronger as a result of several policies of the Obama years and the interest rates in the US are now looking up. The investors reacting to favourable signs from the US economy have begun to move their investments away from emerging markets and to a more secure and mature American economy.

As the money moves away from emerging markets of Asia, our respective currencies decline. Another factor affecting the rupee’s fall can be traced back to the 1990s. In the aftermath of economic liberalisation, we opened our markets for the world and have continued to relax foreign investment regulations since then, resulting in a massive influx of capital. The capital inflow was subsequently more than what the nascent markets of Asia could handle and we saw an Asian financial crisis in 1997.  

We see the same pattern today in economies with high foreign direct investment such as India, Philippines and Indonesia. This makes economists worried about another Asian crisis. The emerging markets are becoming more and more uncertain for investors and the debt is rising at a steady pace. President Trump’s trade battles with China, India and Malaysia are not helping either.

Finance Minister Arun Jaitley said recently that the ‘world’s fastest growing economy does not need to panic’ and maybe he is correct. The current slide of the rupee is not entirely due to domestic reasons. Some would even say that we should not view this incident as the rupee’s weakening but rather the dollar’s strengthening – which is accurate given the fact that the dollar is gaining value over almost all emerging market currencies.

What isn’t accurate is throwing the burden of the slump over to the international markets. Foreign investors have been buying Indian bonds for quite some time and the investment in India’s debt is so lucrative that we hit the limit of foreign purchase of Indian debt in 2017. The BJP government is looking to relax the norms on buying Indian bonds to attract more foreign investors. This might be a very bad idea considering the current situation of our currency.

With the rising dollar, it is getting increasingly harder for India to pay its debt (as the loan in dollar needs to be repaid in dollars and with high dollar value, the loan now costs us more) and by inviting more foreign investors to buy Indian government bonds we risk opening our economy to vulture capitalists.

What is scary about this impending new currency crisis is that it could also turn into a debt crisis, especially in Asian and other emerging markets and particularly in the corporate sector. The dollar or other foreign currency-denominated debt becomes harder to service in terms of local currency as it becomes more and more difficult for us to pay our debt.