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Two Currencies facing Enormous Challenges

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Two Currencies facing Enormous Challenges

The Venezuelan bolivar has become so devalued that shoppers carry the currency in bags in order to afford just a few items. Wallets are now ancient history in the country.100 bolivar is worth about 5 cents in USA. The country’ oil-based economy has suffered a great deal from the falling oil prices over the years. However, the country’s dictatorial political regime is to blame for most of the economic woes. Prices of basic commodities have soared almost two or three fold. Crime rates have also spiked in recent years.

On Sunday (December 4, 2016), the central bank in Caracas announced that it had decided to review the currency denominations. The highest currency will be a twenty thousand note instead of 100 notes. Others notes that will be injected in the market soon will be 500,1000,2000,5000 and 10,000.The bank has also come up with new coins. 10, 50 and 100 Bs coins are set to start circulation come mid-December. This change of currency notes is the government's reaction to last week fall of the bolivar against the US dollar. In the black market, as of last week, $1 exchanged for slightly less than 4500 Bolivar. The central bank of Venezuela, while releasing the new notes and currencies, stated that they aimed to ease payment systems in the entire country. The notes will be distributed from progressively by the bank from its centers in Caracas and Maracaibo and then to the banks around the country. Whether this move will save the collapsing bolivar is anyone’s guess at this point.

Two Currencies facing Enormous Challenges.
Another currency facing huge challenges is the Indian rupee. Last month’s shock announcement by the Prime Minister that the country was demonetizing some currencies sent widespread frustration all over the country. Indians suddenly found their 500 and 1000 rupee notes worthless. The move was made in an effort to curtail rampant counterfeiting of rupee notes and to starve terrorist activities that are funded by fake cash. But the short term results of the move have been far from positive. People have lined up for days in banks waiting to change their notes only to find that the bank had run out of the new bills. India’s working class have lost an enormous amount of work time trying to change their money. People have even died on queues waiting to get the new bills.

But demonetization is the least of India’s worries. The rupee has fallen down 3% over the last month to its lowest level since August 2015. The central bank of India (BCI) has taken costly interventions, all rounding up to more than 500 million, in order to save the rupee in recent weeks. The bullish dollar is partly to blame for the rupee’s woes. The rupee is expected to remain under significant pressure if US President-elect Donald Trump pursues expansionary fiscal policy. Such a policy will favor high-interest rates and will drive inflation up in the US and cause a ripple effect to the rupee.

Foreign currency outflows out of India are also to blame for the diving rupee. The rupee closed at 68.22 yesterday up from 68.23 the previous day. The rupee is gaining ground against the dollar ahead of the bi-monthly policy of Reserve Bank of India on December 7th. Investors will be eyeing the rupee closely in the coming weeks to see if it will continue to gain ground.

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