Despite Pressures, the Rupee’s Remarkable Resilience
Causes for depreciation of Rupee
- Widening current account deficit, persistent risk-off sentiment as a result of geopolitical tensions, ‘a strengthening dollar index, and continuous sell-off by foreign portfolio investors.
- The dollar has strengthened against all currencies, developed or emerging.
- Due to the rising inflation in US economy, the central bank of USA (the Federal Reserve) has increased its interest rate which has resulted in appreciation of Dollar.
The silver lining
- Even though the rupee has had a sharp fall against the dollar, the depreciation has been relatively lower compared previous events like the global financial crisis of 2008 (the rupee fell by over 20% between 2007- 2009) and the Taper Tantrum of 2013 (for seven months from the start of the crisis in May 2013, the rupee had depreciated by over 11%).
Impacts of a weaker Rupee
- Exports from India will become more competitive and can aid in the Make in India Initiative
- However, this not being too evident since the currencies of India’s competitors such as Malaysia and South Korea are also experiencing a depreciation to their currency with respect to Dollar.
- This added with a reduced global demand have blunted the benefits India cud have gained from this.
- On the flip side, the weaker Rupee has resulted in a greater burden for importers especially refineries who need crude oil.
- Moreover, the continued depreciation has made foreign investors doubtful about the prospects of Indian Stock market.
- India’s foreign exchange reserves have reduced by almost $55 billion from $635 billion due to RBI intervening in the global market to arrest the fall of Rupee.
- Promoting trade settlements between India and other countries in rupee terms.
- Offering higher interest rates on fresh Foreign Currency Non-Resident (Bank) and Non-Resident External deposits.
- Widening of investible universe of government and corporate debt.
- Relaxation of the interest rate and amount ceiling for External Commercial Borrowing loans.
- Government could encourage some of the large market cap companies (private and public sectors) to be included in the major global indices such as MSCI and FTSE.
- Government could also expedite India’s entry into bond indices such as J.P. Morgan’s Emerging-Market Bond Index and Barclays Global Bond Index.
Source The Hindu
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