The Indian Rupee And The General Elections

History shows that after liberalization,the Rupee falls ahead of the general elections.For example,in 1996, the rupee depreciated by nearly 10% in the 12 months leading up to the elections. And in 2009, it fell by 18% in the run-up to the polls.

Economist’s explain this phenomenon by pointing out to the governments’ tendency to overspend to satisfy various vote banks as elections approach. This unproductive expenditure causes the Rupee to depreciate, which then forces the government to intervene and try to prop up the currency.

Lay people have a more interesting take on the matter:the money of the political class stashed abroad is brought back to fund elections. A weak rupee means politicians and others bringing back the money are able to get a greater bang for their buck, and it is in their interest that the Rupee remains weak during this period.  

Whichever explanation you choose to believe,the consensus seems to indicate a weaker Rupee for a while.A few days back I posted a roundup of the exchange rates expected by various banks:Link. BNP Paribas was then an extreme outlier. Today they seem to be getting some support from Deutsche Bank,atleast for the near term.Link.

My feeling is that with a new RBI Governor in place,duly equipped with international experience, we will be well placed to go hat in hand,begging for handouts from international financial organizations. Only pawning gold is such an emotive issue in the country that the government is going to do its damnest to avoid doing any such thing before the next general elections.So elections might be preponed and this will be the burden of the next government.So dear citizens hang on tight and brace yourselves for higher prices all around or do your damnest to get hold of some hard currency,if you’d rather make some quick money.