Source: SiliconIndia Finance

 

Interestingly, this is not the first time rupee has depreciated in the run-up to elections. In the year, 1996, the rupee depreciated to 10 percent within the period of 12 months. Even during the 2009 elections it fell by 18 percent respectively. However the elections that were suppose to take place by the end of 2013 is postponed to March-May 2014. Laveesh Bhandari, founder of Indicus Analytics, an economic research firm, offers an economist's justification for this phenomenon: "Typically, governments overspend as elections approach. This causes the rupee to depreciate, which then forces the government to intervene and try to prop up the currency."

The rupee which has touched an historic low of 65 has lost up to 16 percent against the U.S. dollar in less than three months. The government and the Reserve Bank of India have taken several measures to stabilize the decline, but have not been successful.

Moreover, many economists are questioning the panic in the markets and asking the government and RBI in intervening aggressively to defend the rupee. "The exchange rate has created more panic than it should. The fact that RBI and the government are taking calibrated steps to check exchange rate has led to fears as investors feel the authorities are also panicking. This is despite the fact that there have been positive steps in terms of policy," said Madan Sabnavis, chief economist, CARE Ratings.