There is a conspiracy theory doing the rounds that the rupee has shown a high level of consistency in falling just the year before India’s general elections. The logic? A weak rupee means politicians and others can get more rupees for their illegal dollars held abroad – rupees needed to fight elections. A weaker rupee is, it is said, in politicians’ interest since they get bigger rupee bang for their green buck.

As evidence, it is pointed out that the rupee depreciated by nearly 10 percent in the 12 months leading up to the 1996 elections. And in 2009, it fell by 18 percent in the run-up to the polls. The buzz surrounding the theory has been strong because the rupee has depreciated in six out of seven occasions prior to elections since 1989 – the only time it did the reverse was in 2004, when the NDA coalition was in power in 2004. Reuters Reuters This exception, should, in fact, tell us why the connect between rupee fall and elections is not that important. The rupee’s fall may be related not to the need of politicians for rupees, which, in any case, can be raised even locally through corruption and benami holdings, but election uncertainties. In 2004, everyone felt that the NDA would come back to power – in fact, the expected stability in outcome could have been one reason why the rupee didn’t fall. If the outcome was uncertain, as it was in the other elections, maybe the rupee would have fallen in 2004 too. In fact, all the rupee falls before elections can be attributed to other causes too. In 1991, India saw a massive currency crisis when the government had to pawn off gold to meet immediate import needs. In 1998, there was a Russian default and in 1997 there was an Asian currency crisis. In 2001, the rupee fell dramatically after 9/11 and after the dotcom bust. In 2008, a year before the elections of 2009, there was a major global crisis after the Lehman collapse. A currency turns volatile when investors are concerned about political instability and the pace of reforms thereafter. The fear of unwieldy coalitions, the lack of clarity before elections, and populist programmes by the government have spooked investors, who are now on a wait-and-watch mode. In such circumstances, foreign investors can’t wait for eight or nine months to figure out what the government will do. This is good enough reason to pull out your money from India in the run-up to general elections. Indranil Pan, chief economist at Kotak Mahindra Bank, explains this logic to Business Standard. “The prospect of no single political party winning a clear majority puts fear in the minds of foreign investors and this can possibly put pressure on the currency. In anticipation of a regime change, investors might become more guarded. This time, we are struggling with various issues impacting the economy and are likely to go into elections in a haze,” Pal was quoted as saying.