Where goes the rupee?

Where goes the rupee?

Article:

1.Bhaskar Dutta, a professor has talked about interventions required by the RBI and Government to defend Dollar.

Important Analysis:

2.Continued weakening of Rupee over a period of time has raised the concern over the stance RBI and how Government will adopt to deal with it.
3.Depreciation of Rupee is an immediate concern.

4.Fundamental reasons behind the depreciation of rupees:

Internal Factors:

• India has been unable to boost exports over the years.
• India’s efforts in finding domestic source for energy have been inadequate, causing high oil import and widening CAD
• Trade wars among emerging markets.

5. External Factors:

Reasons for attraction towards U.S.economy

• Global capital and Currency speculations are attracted towards U.S economy.
• Cut in Corporate tax in U.S, resulted into shifting investment from emerging market.
• Increased interest rate has further attracted investors.
• Unstable political and economic fundamentals in emerging economies leading to reduced portfolio investment in emerging markets.
• Appreciating Dollar not only against Rupees, but also against Euro and Pound.

6.Government has taken various measures to bring capital inflow and boost economy like:

• Curbing non-essential imports and boost export.
• Encourage inflows into masala bonds (exempting them from withholding tax and letting banks become market makers).
• Encourage corporate bonds (removal of the 20% single-exposure limit on foreign portfolio investors)
• Encouraging manufacturing firms to raise short-term external commercial borrowings in order to curb dollar demand. Though, it may not work as the sentiments are not favorable towards emerging market.
• Government is relying on higher direct tax collections and non-tax revenue (disinvestment proceeds) to make up for shortfalls.

7.Further weakening of Rupees will have an adverse effect on domestic economy such as:

• Hike in fuel price. (This can be brought under control by decreasing excise duty and VAT.)
• Subsequently, Retail inflation (mainly food items) in an economy may spike.
• Balance of payment crisis.

8.Options available to RBI:

• Increase Dollar supply and thereby check the appreciation of Dollar, but with caution.
• It is very less likely that Monetary Policy Committee will raise interest rates if inflation cross the target of 4 %.
• The monetary policy committee should respond to the inflationary result of depreciation, rather than go for rate hikes.

9.Moreover, increase in interest rate will further have an adverse effect on company’s profit (High interest rate, less profit to companies).

• Any big negative change in profitability may make foreign investor pull out of Indian stocks.

10.Alternatives recommended by the Author:

• Induce special floating NRI bond (NRI bonds are forex deposits raised from non-resident Indians at attractive rates for a period of 3-5 years) to attract foreign currency.
• Investors must be protected from exchange rate fluctuation.
• Most importantly sharp fluctuation in exchange rate in either direction needs to be avoided.

11.The government needs to think of a long-term plan to boost exports by removing policy barriers that are impeding the growth of export-oriented sectors.