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Charts & Analysis

The Fall of the Rupee Was To Launder Money For Elections. Want To Buy A Bridge?

Online sites and twitter are abuzz with talk about big rupee falls in the past, and how they seemed to have happened just about around elections.

Between January 2008 and May 2009 the Rupee depreciated from Rs. 39 to Rs. 50, a 25% devaluation. And voila, we have elections in May 2009 and the Rupee falls back to Rs. 44.

Before elections September 1999, the rupee had fallen 14%.

Before elections in 1998, the rupee had fallen 13% but it was the same graph as the September 1999…. (shut up, you’re ruining the fun).

Before elections in 1991, over FOUR years, the rupee had depreciated 24%.

Before elections in 1984, the three year fall was 21%.

This leads us to believe strongly that politicians have engineered the rupee’s fall, sometimes over as long as four years. In many cases, they started preparing for subsequent elections just immediately after one election, and sometimes they thought as much as two elections ahead.

Why would they do this? They have money stashed abroad that they bring back through hawala or send out through hawala or both.

The only exception was the 2004 elections where the rupee appreciated from the lows it saw in 2001 after the dotcom bust and the 9/11 terrorism. This is attributed to the BJP government who didn’t have enough money abroad.

Let me first produce my version of the election chart with the rupee from 1966. I have used a logarithmic chart to better plot the moves up and down so you can see them in their resplendent glory.

The Rupee and Elections

(Data from RBI. Prior to 1991 we were a closed economy of sorts)

While these plots look like they have some steepness prior to elections, the theory is largely silly – the curve is steep because of inflation/demand/lack of exports etc. which are fundamental reasons but get not enough airtime as they don’t involve a larger dangerous force that is plotting to kill our economy.

Why I think This Is Wrong

We have become that sort of people that react in a knee-jerk way to anything and everything. If it doesn’t have a conspiracy theory, it isn’t worth mentioning. Which is why this blog tries to tone down the rhetoric and give you real information.

First, remember that the market has no godfather. No one “manipulates” the market, because, when there are enough participants you simply can’t. RBI is learning that now – it has $272 billion of dollars, and it’s trying to move the dollar down and simply cannot.

The point simply is: The Rupee will appreciate when the money is brought back in. There are just two elections – 2004 and 2009 – when the rupee appreciated before elections. But the rest simply don’t add up. This hawala business is all fine, but I think it’s bullshit that the rupee’s fall has been engineered.

Secondly, there are inconsistencies in the graphs.

Update: I had earlier pointed out that the rupee depreciation between the 98 elections and 99 elections was the same thing. But it has been pointed out there were two separate depreciations – between 35 and 38, between the 96 election and 98 elections, and then from 38 to 43 in the 98 to 99 elections.

This is laughable if you consider that politicians devalue before elections – they start right after they get elected? Then how come the dollar went from 44 in 2004 to 39 in 2007, and that doesn’t get highlighted?  Anyhow.

In all cases, time frames taken are random. Given enough rope I can always find a point in which the rupee has depreciated before every election,.

Third, if the politicians have this kind of power, we should elect them. In 1991, we saw a currency crisis of massive proportions, when we had to pawn our gold for an IMF loan. And we saw this play out over three-four years Also, Rajiv Gandhi was murdered.

In 1998 there was a Russian default, in 1997 there was an asian currency crisis.

In 2001 the rupee fell dramatically after 9/11 and after the dotcom bust.

In 2008 the worldwide crisis took the US into a near depression, with more than 100 banks failing and Lehman/Bear going bust.

If our Indian politicians have that kind of influence, we would probably do best if they remain in power.

Lastly the simple explanation is like this: Global events affect us, and that hurts the rupee. We have a widening current account deficit, that hurts the rupee. (In 2004, we were actually beginning to bring it in control). We ask the RBI to control the rupee when it appreciates, but balk when it sells dollar “reserves” when they depreciate. We have crappy labour laws that make people not manufacture in India, so we import rather than build here. That hurts the rupee.

The rupee falls near elections when it believes there will be no continuity. The fear of a coalition, the lack of clarity before elections, the random populist programs – all of them spook investors, who take money out a year or so before elections, just to wait and watch.

Politicians might be using hawala to bring money in before elections, but it’s very unlikely that they plan to “depreciate” the rupee. At best, election spending is of the order of 50,000 cr. This is TINY in comparison with the dollar trading that happens in periods like two years. (Nowadays we trade Rs. 20,000 cr. a *day*)

If you truly still believe that the rupee is manipulated by politicians before elections, then I have a beautiful monument on the banks of the Yamuna, in Agra, that I could sell you.

All they have to do to depreciate the rupee is to continue with bad policy, use populist measures, and have knee-jerk reactions. But it would be unwise to attribute a conspiracy to what is purely incompetence.

  • hr says:

    i agree that there are multiple reasons for the rupee crash! I think politicians and policy of the govt are a major part of why the rupee has fallen so much so fast… that cannot be denied !
    1. On multiple occasions congress politicians and babus from the upa govts have talked the rupee down…or given mixed signals or not acted right since rupee was in its 50s ,,, they are the causa proxima for engineering the fall for the rupee and making conditions favorable for a one way bet against the INR.
    2. They have ratcheted up the entitlements, the msps at 15+% while not cutting back on their pet subsidies such as fertilizer subsidy and fuel subsidy like kerosene etc…. they haven’t even bothered about cutting the waste or corruption element for so long as it benefits their minions. If u cant let inflation amok or growth
    3. Read
    the only govt during which rupee appreciated was during bjp govt !

  • Harsha says:

    Agreed to all point.
    If currency value reflects the nations trading strength, then at best the chart points out how ineffective successive congress govts have been in attracting investment, improving domestic productivity. The only two durations, when currency gained value seem to be during Janata regime in 1977-80 and during 2000-2004 and immediate aftermath of these two regimes.
    But, in the end all that matters is our export strength. We can’t become a developed economy without gaining respect and market for our products abroad. We consistently fail to create conditions which allow us to excel in exports.
    Just an amusing point – wanting to buy a bridge in India isn’t absurd anymore! PPP model does allow people to ‘buy’ bridges and collect toll on it!

  • Dhananjay Redkar says:

    One explanation can be – 2004 was the only election when it was widely believed that the NDA government will return to power with an increased majority. Rest all the elections from 1989 onwards have been a throw of dice resulting in increased uncertainty on the outcome of election process, which to a certain extent explain the depreciation of rupee (flight of dollars from the country) in build up to the election. The current situation is almost the same.

  • Vivek says:

    interesting graph..2 cents from me
    There was so much talk about elections last year but rupee was not volitile like it is now. Only now Fed is cutting stimulus and it has started the snowball. so election point is not responsible.
    Bad part of government is due to scams they stopped new investment proposals. Cairn can produce more oil, RIL-BP can extract more gas provided they are given fair price for their efforts. Congress is playing safe before elections by keeping populist face (food subsidy, disel and gas underrecovery).
    If am politician why would i bring back my untracable safe heaven money which is kept for my future generations. I will milk builders, local business corporates, road contractors etc. for elections.

  • Leo says:

    People who dont understand capital flows come up with such awesome stories.i am not saying it is wrong.Since it looks real it is not like 100 % accurate.
    the thing is we are spending like crazy.if u see MMS is responsible for this .He is like Ben bernanke of india.Why people dont shout there is a housing bubble in india and shut up and buy real estate .complain when they cant make money out of some other asset.
    We borrowed dollors in good times and now entering into india defualting on its bonds at a certain point.It is not just india it is the whole world.That is why the dollor is rising not coz of some nonsense theories out there.the debt in dollors blowing up and it will accelerate sooner or later.
    Secondly why india cant raise rates attract capital like volcker did in 1980.s
    he brought the gold frenzy down for sure.It is obvious who will get killed if rates rise .One is govt debt second housing(the goons in govt get slaughtered for a long time who have no innovation but rigging land prices).
    One of the greatest books on the rupee was written by ambedkar ji.( amazing he had no computer no info like we have in this modern age).
    there is a serious problem we have with our banking system.Our population has gone up from 1960s till date by 3x but our money supply has gone parabolic.Money supply is out of control.(who knows it might go electronic soon with smartphones)

  • Guruprasad V says:

    Election results itself might be helpful for Rupee. If a party wins in a big majority with maximum no of seats it could probably be helpful for INR. For the kids who doesn’t understand Forex markets, No Individual or even central bank could control the forex markets. Forex Markets are much much bigger than the central bank. Everyone knows what happened to British Pound. Single guy won against central bank. Only idiot would believe in all those stupid theories.

  • R says:

    I totally agree with you.Let us not connect every incident to politics and Mr. Modi.

  • Chand kiran madan says:

    Reasons are many but basic is that we have allowed MNCs to use our country as big market and our own industry have been forced to stop manufacturing even for our needs , what to talk of Exports. If today you call Rattan Tata To Take Charge of Policy Making in India , He Knows this job very well, he will do every thing that needs to be done. India will be a Manufacturing Nation and not just a Market..

    • Leo says:

      why should india be a manufacturing hub jeez this thing of india should reinvent it self is all crazy. we are good at agriculture we should promote agriculture

      • Indian says:

        A 10 boxes of Iphones can buy a truckload of Grains.
        We need to produce & export high value of goods but not low value products be it IT Service, textiles or agriculture products

        • Leo says:

          you cant eat iphones can u ? there is a food crisis coming .I see a local agri guy telling me about it. at that point it is mad max scenario

  • Krishna Tumkur says:

    We have to factor in inflation.while it was in 2% in US,it was 17% in India and this is a predominant factor in emerging markets.India’s growth rate is abysmal at around 4.5%,which is the key factor.To a big extent yuan is regulated,while rand,Turkish lira and your Brazilian lira is not controlled.India’s current a/c deficit not withstanding,all the emerging markets dependent on crude have taken a hit.also the inflation factor has to be taken into a/c which the market forces tries to correct these imbalances.Mr Bill bonner has written an in depth profile of these currency fluctuations,some caused by extraneous factors,the other by our inept govt.Strong measures, than strong language is necessary .

  • v says:

    Maybe no Conspiracy in the long term …but it is not difficult to engineer short term crashes or windows of opportunities for the politicians.
    When your fort is attacked by an enemy which knows ur weakness you at least tend to defend ur weak areas …or do u point them out ? This left a feeling of aa bail mujhe marr in the minds of most!
    With a profligate govt and bad policy the writing was on the wall ! But we have a partially convertible currency and an rbi that has massive powers but was seen to be doing nothing.
    Here we have officials either non committal on policy or saying things that give green signal to the speculators to short ! especially in volatile mkts …
    When rupee crossed 52 .
    The RBI Gov D Subba Rao blamed the fall on the ongoing EU crises. He was non commital on RBI policy.
    Subir Gokarn, a deputy governor at the RBI, said the RBI would be careful about using foreign exchange reserves aggressively to protect depreciation of the rupee.
    Economic Affairs Secretary on Monday said the ability of Indian monetary authorities to intervene and stem the rupee’s slide was limited