As the Rupee slides from about ₹88 per U.S. Dollar to around ₹89.62 per U.S. Dollar (roughly 2 percent) and with the black-market rate flirting with the symbolic ₹100 per U.S. Dollar, the financial press has gone into its usual panic cycle. Financial press scream about instability, “loss of credibility,” etc. This drama happens every time the Rupee weakens even slightly.
I’m not saying currency depreciation is good, it has consequences. But what’s surprising is the level of asymmetry in media attention compared to austerity and unemployment. You will never see the such coverage on the millions of unemployed and underemployed Indians, or the millions of starving, malnourished children. These issues barely register in the financial press, even though their scale is far more economically devastating than currency depreciation.
Most Indians do not care about the exchange rate of the Rupee. For ordinary workers, the exchange rate matters only to the extent that it affects the local prices of the goods they buy such as fuel, cooking oil, certain foods, medicines etc. A wage labourer doesn’t watch the forex market; they watch the price of food and fuel prices.
But for the rich, the exchange rate matters much more. Why? Because the wealthy i.e, the top 1 percent store large amounts of their wealth in Rupee-denominated financial assets. When the Rupee depreciates, the international purchasing power of their wealth goes down. All the Indian billionaires you see on Forbes are “billionaires” in Dollar terms. If the Rupee depreciates sharply, their global wealth rankings fall even if nothing changes domestically.
The rich also consume heavily imported luxury goods such as electronics, luxury fashion etc. and they vacation abroad frequently. All of these become pricier as the Rupee weakens. They will still be able to afford it, but they feel the loss more directly. Most Indians does not import anything directly.
It’s obvious why the financial press obsesses over the exchange rate; depreciation hits the rich both through reduced purchasing power and through the price effects of high value imports. The poor feel only the passthrough i.e. local price hikes.
When an external shock occurs (for example the Trump tariffs), someone must bear the adjustment costs. India has a capitalist economy, so of course the capitalists pass the burden onto the consumers.
Something you never hear about from the financial press is the income loss arising from government austerity. With the recent depreciation, the Indian government decided to implement labour “reforms” after putting them on hold for five years. This “reform” is a form of internal devaluation, in which a country that does not want to let its currency depreciate too much tries to regain external competitiveness and credibility by reducing labour “costs” for the capitalists. Labour market “flexibility” is a form of internal devaluation. The Government is likely doing this to bring in foreign investment (in part to keep the exchange rate stable) and to gain external competitiveness.
Internal devaluation, unlike the external form, directly hurts the poor and the working class, whereas currency depreciation erodes the wealth of everyone, including the rich. For a country that cannot adjust its exchange rate (like the Eurozone countries), this may be the only option. For India, with its own floating currency, the only reason one would do this is to preserve the value of wealth hoards and maybe even increase it if exchange rate depreciation is sufficiently strangled. Even if the currency depreciates and erodes the wealth and income of capitalists, the decreased labour costs from the “reforms” will counter at least some of it.
My point is:
- Currency depreciation spreads the adjustment costs of an external shock more evenly by eroding all financial wealth, including that of top holders.
- Internal devaluation focuses all the adjustment costs on the workers.
- Internal devaluation also disciplines the workers and destroys their bargaining power.
That’s all.