Why does it go up or down? What could be done about it?

Between 1985 and 2005, a period of 20 years, the exchange value, or exchange rate of the Rupee went down from about 10% of a US Dollar to just a little above 2%. More recently, that is since 2006, it has gone up to around 2.5% of a US Dollar. About 40 rupees now exchanges for one Dollar, as compared to 10 rupees in 1985, and 45 rupees in 2005.

How does it affect us?

The reason that the exchange rate of the Rupee affects us all, workers and peasants included, is because the external trade of India, export and import of commodities, impacts us directly or indirectly. When the Rupee goes down in value, exported commodities from India become relatively cheaper in the world market, while imported commodities become costlier in the Indian market. The opposite happens when the Rupee goes up in value.

When import prices rise, they push up the prices of many commodities in the market, which has a negative impact on the purchasing power of all working people. When export prices rise, they lead to the closure of many export oriented units whose products no longer sell in foreign markets, throwing many workers in India out of jobs. Fall in import prices drive many peasants and small producers out of business. The impact of the Rupee exchange value on our lives has increased over time, because the share of external trade in the economy of India has gone up from around 10% to over 40% of GDP during the past two decades.

The exchange rate affects us also because the foreign debt owed by the Government of India and by Indian corporations are denominated mostly in US Dollars. When the Rupee goes down in value, the burden of foreign debt becomes heavier than before; when the Rupee rises in value, the external debt burden becomes lighter than before.

The exchange rate has a major effect on the rate of profit that foreign investors can earn in the Indian market. Foreign investments into our country are generally made either for setting up new factories or for buying shares of existing companies. When the value of the Rupee goes down, the profit rate reaped by foreign capital goes up. Every dollar that gets invested commands more commodities in the Indian market than before. When the Rupee goes up in value, the rate of profit earned by Indian capitalists who invest abroad goes up. Big windfall gains have accrued to the Tatas, for instance, who raised US Dollar loans to acquire foreign assets, such as Corus steel company. The repayment of the Dollar denominated loans have become cheaper for the Tatas as the rupee has gone up in value since that deal was made.

What makes the Rupee go up or down?

Until the 1970s, the Reserve Bank of India followed a fixed exchange rate policy, pegging the value of the Rupee at 13.3% of the US Dollar, that is at Rs 7.50 per dollar. The US Dollar commanded a hefty premium in the black market in those days, which showed that the RBI was overvaluing the Rupee. The capitalists of the world put pressure on India to let the Rupee fall in value. A gradual devaluation began to take place in the 1980s. The big jump came in 1991, when the Indian bourgeoisie launched its program to globalize its capital and production, through liberalisation and privatisation. The Rupee was devalued by about 20% in one stroke, to boost the profitability of Indian exports in the world market, and the profitability of international investments in India.

The Reserve Bank of India kept on purchasing more and more dollars in the market during the period 1995-2005, accumulating huge foreign currency reserves as a result. In whose interest was this being done? It was being done in the interest of the Indian big capitalists who were keen to expand their export of goods and services to foreign markets, and in the interest of attracting more foreign capital to the Indian market. By deliberately keeping the exchange rate of the Rupee below its market value, particular sections of the big bourgeoisie, Indian and international, were benefiting at the expense of the entire people.

When the rupee went down in value, between 1985 and 2005, Indian capitalists engaged in commodity exports benefited from higher rates of profit, and so did the foreign investors who brought their capital to India. When the rupee has risen in value in 2007, Indian capitalists investing abroad have benefited, as well as foreign companies eager to expand their commodity sales in India. It would appear from this that different sections of capitalists have been driving the Rupee value up or down, in line with their sectional interests. However, this is only part of the truth.

Movements in the exchange rate of the Rupee to the Dollar has been driven not only by the actions of governments that serve capitalist interests. They are also governed by objective economic laws, that operate independent of the will of any individuals or governments. The more rapid the rise in the productivity of labour in India, than in the productivity of labour in the United States, is an objective factor underlying the upward pressure on the value of the Rupee in recent times.

Money is a measure of the value of commodities. The value of commodities are determined by the quantity of social labour required for their reproduction. This means that one Rupee represents a fixed quantity of socially necessary Indian labour. Similarly, one Dollar represents a certain quantity of socially necessary American labour. If the rate of increase in labour productivity is faster in the Indian economy than in the US economy, which has been the case in recent times, then this would lead to a rise in the exchange value of the Rupee with respect to the US Dollar.

What could be done about it?

We could demand a stable exchange rate policy, so that people do not face day to day uncertainty and volatility. But the experience of the past shows that it is not wise to hold the Rupee constant forever, ignoring relative movements in the productivity of labour in India and the rest of the world. Such a policy leads to black markets in foreign currency. The Rupee exchange rate could be held stable, and at the same time periodically reviewed and adjusted in line with changes in relative productivity. A state that respects the labour of its citizens would not follow a policy of deliberately under-valuing its own currency.

In conclusion, what could be done, and in fact needs to be done, is a reorientation of the economy and economic policy, including exchange rate policy. The economy and economic policy are currently driven by the interests of the biggest capitalists, with the working people left to bear the consequences. This must be turned around, with the working people becoming the decision makers and their state taking responsibility to ensure that every member of society is provided with prosperity and protection.