There has been a great deal of attention directed towards India’s rupee lately, and for good reason. The currency has lost 7% of its value against the US dollar in the last year alone, which means that an Indian would need more than $1 to buy just one dollar worth of goods. Though the volatility is certainly troubling, there are actually benefits to this strategy when you take it on long term. These can include increased export opportunities for Indian businesses as well as cheaper imports for those living in India.
For a long time India has had poor performance economically and this is commonly attributed to their strong currency. The truth is, if the government wants to improve their economy, they need to stop trying to control the markets and allow it to naturally grow. In order for India to expand they need a free-market economy that allows free trade so that businesses have better opportunities. The Indian rupee has been weak for decades, but it hasn’t prevented economic growth.
In the long term, there are actually many benefits to having a weak currency. First, as it takes less rupees to buy one dollar, exports and tourism will increase as people in India will be able to buy more goods from other countries. This is beneficial for India because it means their goods will be able to compete with other nation’s exports and they can expand their export market by allowing businesses from other countries to sell goods in India. Second, competitors don’t have as much of an advantage over Indian products.
Rupee strengthens against other currencies
It is common for countries to have a strong currency, but this can actually hurt India. Some of their major competitors are beginning to increase their exports and reduce the value of their currency so they can sell more products at the same price. A weak currency forces these competitors to compete with prices that rise as consumers need less rupees in order to afford the same quantity of goods. So sometimes stronger currencies can be good for companies, but sometimes it is bad.
Caution over rupee
Rupee gained 0.3% against the dollar on the back of higher local equities, but analysts said they were still cautious on how much the currency could fall if global sentiment continued to remain weak. The Reserve Bank of India has been selling dollars in the spot market in order to stem the rupee’s fall, but this has only had a limited effect as investors remain worried over global growth.
A political conspiracy theory for the sudden fall of the Indian Rupee has been propagated by right wing elements. They have been alleging that there is a conspiracy between the United States, China and Pakistan to destabilise India’s economy by engineering a decline in value of its currency.
The Indian rupee is the official currency of the Republic of India. It is subdivided into one hundred paise (singular: paisa). The issuance of the currency is controlled by the Reserve Bank of India. The Reserve Bank manages currency in India and derives its role in history from the Imperial Bank of India, which was established on 1 April 1906 by an act of British Parliament. The rupee is named after the coin, rupiya, first issued by Sultan Sher Shah Suri in the 16th century.
Indian Rupee Drops to another record low as foreign funds exit
The Indian currency has been on a sharp decline in recent months, with canny investors making or losing fortunes with it. On Wednesday, the rupee dropped to another record low against another foreign currency, the dollar. The crash has forced foreign investors to dispose of their holdings and sparked calls for India to change its economic policies.
The Indian Rupee has suffered a sharp decline against the US Dollar and Pound sterling, in the last week of November. This is not surprising as it goes with the general slide in global currencies. However, it has been brought about by speculative forces that are manipulating systems and economies worldwide to train them to accept onerous tax-funded bailouts, enforced economies and debt-inflated currencies.
Impact of rupee depreciation on Indian economy
“The Indian rupee suffered its biggest ever monthly fall against the dollar in August, touching a record low of Rs 79.37 per dollar. There are a number of factors for this crash, one major reason being that India is importing more than it is exporting, and has been running up more debt than its revenues can cover.”
RBI intervention in currency markets to the tune of over $1 billion dollars is another reason for the sharp fall. The currency is also being manipulated by countries like China and the US who are using their influence to weaken its value. The rupee has been one of the worst performing currency in Asia this year, with a steep fall of almost 7%. There were two reasons for this crash. The first was because of the hike in crude oil prices that took place during the second half of 2018. The second one is because of India’s huge trade deficit, which will continue to widen if we don’t increase our exports and reduce our imports.
Why has the rupee fallen?
The rupee’s two-year fall is largely linked to India’s sudden plunge in oil import following a surprise reduction in the country’s crude oil production by the government. For the first time in 15 years, India cut its crude oil production by 6 percentage points to 3.78 million bpd. India’s plummeting export numbers have also contributed to the rupee’s fall – with only 76% of total exports hitting the target of $248 billion, down from 81% last year.
The rupee has hit a new record low against the dollar as a projected rise in US interest rates pushes the rupee towards an all-time low. The rupee is falling due to several factors such as rising crude oil prices following the collapse of the OPEC deal and the depreciation of emerging market currencies. The central bank in India tried to intervene in currency markets but this had little effect on the rupee which continued to slide.
The rupee’s impact on inflation
As per RBI’s annual report, the rupee’s depreciation may have a positive impact on inflation. “It is true that the depreciation of rupee will lead to an increase in inflation but since there are other factors affecting food prices as well, it won’t affect inflation as much.” India’s central bank is trying to shore up the currency as it continues to slide, but it has little power in a world where there are many more players with much bigger stakes. The RBI has spent billions of dollars trying to prop up the rupee, but this has had little effect on the currency’s fall.
The Reserve Bank of India has the power to maintain the exchange rate through open market operations. The RBI buys and sells government securities to control the level of foreign currency in circulation. It also regulates the use of foreign currency by gold and diamond traders by insisting that they have a bank guarantee for their holdings. An exchange control law prohibits international purchase of Indian stocks, bonds and treasuries, but it does not effectively prevent overseas citizens from investing in Indian equity markets through mutual funds or direct purchases.
Household expenses go up
In the last two years, household expenses have gone up tremendously. As rupee depreciates against US dollar, the cost of living increases as essentials become less affordable. Consumers are reporting a hike in prices of essential commodities like milk & products, soaps & detergents, pet foods and even edibles such as onions & tomatoes due to rising inflation rate in different sectors. The central bank is not able to intervene effectively because of heavy foreign inflows into financial assets.
The RBI working does not reflect the full extent of the decline in the exchange rate of the Indian Rupee and is not able to control this rise at all. The central bank has already spent more than Rs 10 billion on forex interventions just to keep the exchange rate stable. On top of this, they have also spent around Rs 4 billion on gold ETF purchases, which is around 12% of their gold reserves.
What does a week rupee mean for business, imports and exports?
India is the world’s 11th largest economy and accounts for a major share in global imports and exports. The depreciation of rupee has a strong correlation with India’s imports and exports. Presently, the rupee is depreciating against all major currencies, but there has been an increase in US dollar purchases from overseas investors. As the dollar value of Indian goods fall in overseas markets, they become expensive, which hampers their competitiveness.
The rise in the value of the dollar means that exporters are now earning less from international sales. Currently, Indian companies are finding it difficult to compete with their Chinese counterparts because of low labor costs which has made their products more competitive. The depreciation of the rupee will only add to this problem.
Current account deficit widens
India imports many more goods and services than it exports. The current account deficit has worsened in the last few years, which is due to rising oil prices. At the same time, India’s imports have grown at a faster pace than its exports. This leads to a widening of the current account deficit. In May 2018 the deficit stood at $11 billion – around 2% of GDP.
The depreciation of rupee has only added to this problem and will continue to put pressure on India’s balance of payments for some time to come. One way to reduce the current account deficit is to increase exports and cut down imports by hiking domestic production. The Rupee depreciation has negatively affected corporates to their current account imbalances despite their efforts.
Despite pressures, the Indian rupee’s remarkable resilience
There is no doubt that the rupee has been very resilient and it has held much above its targeted level. This indicates how central banks have failed to control the long lasting forces of inflation and domestic investment which are boosting demand for the currency. The Central Bank in India is also trying to stabilise the exchange rate by selling government bonds from time to time.
The Indian Rupee’s depreciation is only adding to its problems. The RBI has little power in the currency market and it cannot control the long-term forces of inflation and investment that are raising the demand for its currency. India’s central bank has already spent more than Rs 10 billion ($125 million) on forex interventions just to keep the exchange rate stable.
The rupee is predicted to fall further in the next few months. The Central Bank of India has issued advisories against using foreign money for investments and buying gold. People have not been given a long enough breathing space to adjust to the devaluation. The Rupee has fallen by 8% within a week and one expects this trend to continue over the coming weeks and months.
Why is rupee falling against USD?
The US dollar is the world’s most dominant currency. The countries that trade a lot with the US use its currency to settle transactions. Countries that have pegged their currencies to the US Dollar may have to devalue as well if they have not done so. This is happening in India, where a number of countries are trading heavily with it and rely on the Indian Rupee which is pegged to the US Dollar.
The Indian Rupee is now trading at Rs 79.37 to a USD. The weakening of the rupee is due to various reasons. First, the global crude oil prices are continuing to rise, which is adding more pressure on India’s current account deficit (CAD). Secondly, the rise in US interest rates are also moving the Rupee downward. Lastly, the Indian economy is also growing at a slower pace than expected. These factors are forcing India to maintain its peg to the dollar and have no choice but to devalue its currency.
RBI, Centre look to ensure gradual Rupee depreciation
The central bank has been using forex intervention to prevent the depreciation of Rupee. The central bank is selling government bonds to bring down the value of Rupee. They are using accrual based inflation targeting framework to manage the country’s exchange rate over a long period of time.
The RBI has set a target for the exchange rate and it is targeting Rs 70 per USD. Currently, the Rupee is trading at Rs 79.37 against a USD. The central bank has already spent more than Rs 10 billion ($125 million) on forex interventions just to keep the exchange rate stable.
The rupee’s depreciation also makes imports cheaper and exports expensive. It is expected that the central bank will continue with its forex intervention and not able to intervene effectively because of heavy foreign inflows into financial assets. In addition to this, the RBI has also been selling gold ETFs.
Depreciation of the Indian currency: Implications for the Indian economy
The Indian Rupee is one of the strongest currency in the world and has been very resilient in the last five years. The decline of the Indian Rupee is because of the depreciating US dollar and rising oil prices. The declining value of Rupee will put a major pressure on India’s current account deficit (CAD), which is a large part of the country’s economy.
Even though it was expected that a depreciation would have occurred, it has come on much quicker than anticipated. Another reason for the currency’s fall is the rising US interest rates. The Indian Rupee has now depreciated by 8%, which is one of the worst performing currencies in Asia.
The current account deficit has widened and this will put pressure on India’s currency. An RBI official said that Rupee’s depreciation will only affect short term fundamentals and not long term growth in a very major way. The rupee has fallen to a historical low of Rs 79.37 against a US dollar. Although the rupee has fallen, it is still the strongest one in Asia and one of the strongest currency in the world. The central bank is making efforts to keep the value of rupee stable by issuing advisories against using foreign money for investments and buying gold.
Conclusion
The Indian Rupee has fallen against the US Dollar by around 8% in the last 10 days. The depreciation of Rupee has been accompanied by a rise in oil prices. Most analysts believe that the fall will continue and this will make imported goods more expensive as they become more expensive in Indian currency.
There has been no formal announcement to take away the currency’s reserve status, which means that most transactions are still being carried out with US Dollar, which is causing problems for some people and companies. In addition to this, the depreciation of Rupee is due to a number of factors and pressure from the US Dollar, which is causing the depreciation. India’s economy is also facing other problems and these are being magnified by the current account deficit.
Even though many people are expecting that a depreciation would be taking place, it has come on much quicker than anticipated. Another reason for the currency’s fall is the rising US interest rates.
