FALLING INDIAN RUPEE – CAUSES AND IMPACT ON INDIAN

ECONOMY

From the past few months, rupee value is continuously depreciating. Several

factors such as rising crude oil prices, higher capital flows, strengthening dollar
etc. are contributing to the depreciation of rupee. As of July 2018, 1 US Dollar 
= 68 Rupees.

One of the first visible effects of currency depreciation is the country’s imports
become more expensive and exports cheaper. The reason is simple. It takes
more rupees to pay for the same quantum of imports and fewer dollars for a
buyer to pay for the same quantity of exports.
More expensive imports are likely to drive inflation upward, especially in India
where input products constitute a large part of our imports. In addition, a
depreciating rupee also impacts the oil import bill since it costs more rupees
per barrel of oil, which plays its own part in pushing inflation up.

Impact of falling rupee on Indian economy :

 Many exporters are postponing exports to get more profit as the value of
rupee is continuously falling. This is increasing Trade deficit (Imports –
Exports), which inturn increases Current Account Deficit (CAD).
 Traders will prefer to export goods rather than selling them in domestic
markets. This will increase the prices in domestic markets. Along with that as
imports are costlier, imported goods will become expensive. As a result of this
entire process, inflation occurs. When inflation is too high, sales will be
dropped affecting country’s economy.
 Rise in inflation will reduce savings from people . This will negatively impacts
country’s economy because savings and investments are extremely important
for economic growth.
 Repaying foreign debts will become much more expensive . This will increase
burden on Indian economy.
 Falling rupee increases pressure on Foreign exchange reserves.

The mad rush for dollar by importers and currency speculators was halted
temporarily after the central bank, Reserve Bank of India, aggressively
intervened in the currency markets by selling dollars in both spot and forward
markets to arrest the slide in the rupee. If the RBI had not intervened in the
currency markets on that day, the rupee might have breached the
psychologically crucial mark of 70 to a dollar.
The RBI has not yet disclosed how much foreign exchange reserves were spent
on that day, but market observers estimate that the RBI might have spent
close to $2 billion in the forex markets to stem fall in rupee value.
After a gap of four years, the RBI increased the benchmark repo rate, the rate
at which the central bank lends money to banks, to 25 basis points on
6th June, citing upside pressure on inflation due to rising crude oil prices which
hit $80 a barrel in mid-May 2018. However, this move has not stopped the
rupee from falling.
Analysts predict a weaker rupee in the coming months. It is expected to remain
in the 68-72 range against the US dollar during the year amid high oil prices,
tightening of global liquidity, a strong dollar, and growing protectionist
tendencies. Analysts also predict one more policy rate hike by the RBI in the
range of 25-50 basis points before the end of 2018.

Will a Weaker Rupee Boost Exports?

There are some who argue that a weak rupee will make exports more competitive and
thereby spur exports of goods and services. A weaker currency alone cannot boost a
country’s export while a gradual, non-disruptive depreciation as part of a wider trade
strategy can be beneficial in the long run.

In the current context, a depreciated rupee may not help much in boosting exports
due to four key reasons.

~First, the ongoing currency depreciation is not unique to India. The currencies of
many other EMEs are also depreciating concurrently. Some competing EMEs have
witnessed even greater depreciation in their currencies.

~Second, the recent episodes of rupee depreciation had no significant positive impact
on Indian exports. During the ‘taper tantrum’ episode of 2013, Indian rupee lost 20
percent of its value, but that did not result in significantly higher exports.

~Third, a large segment of India’s merchandise exports (such as gems and jewelry,
chemicals, and textiles) has a very high import intensity due to their dependence on
imported inputs.

~Fourth and more importantly, it is not easy to stimulate exports through currency
depreciation when the global demand is sluggish. As global demand is expected to
remain subdued in the next few years, India’s export prospects are limited.

Time for a More Cautious Approach

Though the Finance Minister has recently stated that the government will not have
any “knee-jerk reaction” to stem the rupee fall, the Indian authorities need to remain
cautious as any big event in large economies can potentially trigger global risk-off
sentiments. In such circumstances, the Indian financial system and the real economy
cannot remain immune to global meltdown.

From a development perspective, the quality of capital flows is important. The policy
emphasis should be on attracting long-term capital inflows that improve productive
capacity rather than short-term, volatile flows that are prone to abrupt reversals.

LINKS:

http://www.madhyam.org.in/rupee-depreciation-causes-and-consequences/

http://www.groupdiscussionideas.com/impact-of-falling-rupee-on-indian-economy/

https://www.thehindu.com/business/Economy/what-does-the-falling-rupee-mean-
for-you-and-economy/article24732052.ece