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INDIAN RUPEE CRISIS

Indias Balance of Payments since 1970-71, it is seen that external account


mostly balances in 1970s. in the second half of 1970s there was a current
account surplus,this was a import substitution strategy. In 1980s, current
account deficits start into a BOP crisis in 1991. It was in the 1991 Union
Budget where Indian Rupee was devalued and the government also opened up
the FDI. India Flexible rate system was on the fixed rate, when it was switched
to floating rate model. Fixed Flexible rate is the rate fixed by the central bank
against major world currencies like US dollar, Euro etc. Floating Flexible rate
is the rate determined by market forces based on demand and supply of a
currency. If supply is greater than the demand of a currency its value falls, as is
happening in the case of the US dollar against the rupee, as there is huge
inflow of foreign capital into India in US dollar.

The current scenario flow of foreign capital to reduce when compare with last
two decades. Lacking of inefficient market condition, highly dominating
budget against the small traders, Balance of Payment face the falling trend,
high investment in gold and decreasing the revenue collection of existing
foreign investors. These are all the factors to support decreasing rupee value
against the dollar.

Tapering in QE was attributing this strong inflationary force in India,


threatening to BOP crisis. It was also argued that inflation was due to supply
constraints.

Tapering of QE announced in 2013 caused a depreciation that is decrease in


the value of the Rupee because it led to weakening the dollar against the rupee
because of the increased demand. This money was invested in India in the
form of foreign direct investment or through foreign institutional investors.
This had a huge impact in India, making it crash along with the bond market.
Weak BOP affected India in regards to inflation and its Rupee exchange rate
by losing exchange reserves. There can also be a reduction in foreign
investment. The deficits will continue to depreciate the rupee and lead to a
higher inflation and weaker exchange rate.

Some of the measures taken by the RBI during the 2008 financial crisis were,
it massively reduced policy rates and the CRR. The repo rate and CRR were
reduced 4 times. The RBI also created a potential provision for primary
liquidity that had to be maintain which was of 5.6 trillion. Interest rates on the
foreign currency were raised on the deposits made by non-resident Indians.
These steps were taken to increase the supply of dollars in the foreign
exchange market to devaluate the U.S dollar against the Indian rupee.

The opportunities I possibly see with India now as the Rupee has depreciated
so much are very low. Maybe big exporters will be able to benefit from it
because most of their sales come from abroad. But for many industries, the
depreciating rupee has increased imported input costs, which isnt good and
can possibly slow down imports. Labor issues with relation to wages is also a
negative due to the depreciation of the rupee.