Indian Rupee is facing a free fall provoking fears of recession in the Indian economy. Of all the analyses of the decline in rupee, one very interesting angle is the link between falling Indian rupee and 2014 general elections. Here is a snapshot:
–Rupee falls in every run up to elections
– Depreciating rupee means more black money can be translated into elections funds
-Government of the day spends on populist schemes before elections which leads to fall in rupee
INDIAN RUPEE FALLS IN EVERY RUN UPTO ELECTIONS
Rupee has lost 16% in the last three months against dollar. In 1996, it lost 10% of its value against dollar and in 2009, it lost 18%. In the year 2004 when NDA was in power, it did not lose its value against dollar instead, it appreciated in comparison to dollar. Indian rupee in the year 1996 and 2009 stabilised once the elections were over. Generally, a country going to elections is facing an environment of political instability. Investors are not sure which party will come back in power after elections. This lack of surety about the kind of policies a political party will follow leads investors to exercise caution while investing. They generally put their plans on hold which leads to reduced supply of dollars against rupee, moving dollar high and bringing rupee down.
A FALLING RUPEE IS IN THE INTEREST OF POLITICAL PARTIES
A conspiracy theory which cannot be negated about fall in rupee ahead of elections is that political parties hold a lot of black money abroad. When elections advance, these political parties require funds to fuel their campaigns. A weaker rupee is in their interest at this juncture as they can bring back more money in form of rupee into the country. The same was seen during Pakistan elections as well when their currency fell in run up to the recently concluded elections. In 2004, rupee did not fall as much as it fell in 2009 and this time around. BJP in 2004 was sure of its re-election due to the India shining sentiment which is why investors felt safe and BJP did not require huge funds for campaigning and consequently rupee did not fall.
THE PRESSURE TO DOLE OUT GOODIES TO WIN ELECTIONS
The party in power feels immensely pressured to fight anti-incumbency that is negative sentiments against its re-election. Thus in order to consolidate its vote base and woo new bases, it often ends up over-spending on populist schemes such as the Food Security Bill. This leads to further widening of current account deficit and devaluation of rupee. Huge expenditures by government of the day also dampen investor’s sentiments and thus lead to withdrawal of dollars, making rupee fall even more.