{"id":196576,"date":"2022-07-21T19:00:26","date_gmt":"2022-07-21T13:30:26","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=196576"},"modified":"2022-07-21T18:34:20","modified_gmt":"2022-07-21T13:04:20","slug":"fall-in-rupee-value-reasons-concerns-and-solutions","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/fall-in-rupee-value-reasons-concerns-and-solutions\/","title":{"rendered":"Fall in Rupee Value: Reasons, Concerns and Solutions – Explained, pointwise"},"content":{"rendered":"\n\n\n\n
For\u00a07PM Editorial<\/strong>\u00a0Archives click\u00a0HERE <\/a>\u2192<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n
Introduction<\/h5>\n

There has been a consistent deterioration of Indian Rupee’s (INR) exchange rate with respect to the US Dollar ($) over the last few month. It breached the psychologically significant exchange rate level of INR 80 to a US$ in early trade on 19th July, 2022, although it recovered to close at 79.90. <\/span>The fall in Rupee has been going on since the war in Ukraine began, and crude oil prices started going up. The deteriorating exchange rate poses another challenge to the policymakers; in addition to the high inflation and rising unemployment.<\/span><\/p>\n

What has been the recent trend of Rupee’s Exchange Rate?<\/h5>\n

The Indian Rupee has been witnessing a steady decline this year, losing more than 6% against the US$ since the beginning of 2022.<\/span><\/p>\n

In the last 10 months, the Rupee\u2019s exchange rate with the Dollar has fallen 8.7%, from 73.6 to 80. However, historically the Rupee depreciates by about 3% to 3.5% in a year.\u00a0<\/span><\/p>\n

Further, many experts predict that Rupee may weaken to ~US$ 82 in the coming 3-4 months. <\/span>In fact, the International Monetary Fund (IMF) foresee the Rupee to fall to 94 Rupees to a US$ mark by FY2029.<\/span><\/p>\n

\"Exchange<\/p>\n

What are the reasons for fall in Rupee value?<\/h5>\n

First<\/b>,<\/span> the U.S. Federal Reserve<\/strong> has been raising its benchmark interest rate since March 2022<\/span><\/b>. With higher interests rates in the US, investors can get better returns by investments in the US. Hence, they have started to pull-out their money from emerging markets such as India. <\/span>This, in turn, has put pressure on emerging market currencies which have depreciated significantly against the US Dollar so far this year.\u00a0<\/span><\/p>\n

Even developed market currencies such as the Euro and the Yen have depreciated against the Dollar and the Dollar index is up more than 9% so far this year.<\/span><\/p>\n

\"Trend<\/p>\n

Source: The Times of India. Major global currencies have depreciated in relation to the US$ since January 2022. The major reason is the increase in the interest rates by the US Federal Reserve. Russia-Ukraine war and the rise in commodity prices have also contributed to the trend. In fact, in relative terms, Rupee has performed better than Yen, Euro and British Pound. Rouble has appreciated because of increase in oil trade in Russian Rouble due to sanctions.<\/em><\/p>\n

Second<\/b>,<\/span> India\u2019s current account deficit<\/b> is expected to <\/span>hit a 10-year high of 3.3%<\/b> of GDP<\/strong> in the current financial year. The import bill has been rising due to high oil prices since the Russian invasion of Ukraine<\/strong>. The war has also resulted in steep rise in prices of other commodities which has made the situation worse.<\/span><\/p>\n

Third<\/b>,\u00a0 a major reason for Rupee depreciation has been <\/span>consistently higher domestic price inflation in India<\/b>. Higher inflation in India suggests that the RBI has been creating Rupees at a faster rate than the US Federal Reserve has been creating Dollars.\u00a0<\/span><\/p>\n

\"Determination<\/p>\n

How does the RBI respond to the fall in Rupee?<\/h5>\n

As a matter of policy, the RBI has usually tried to slow down or smoothen (rather than reverse or prevent) the fall in exchange value of the Rupee against the US Dollar.\u00a0<\/span><\/p>\n

The aim of the RBI\u2019s policy is to allow the Rupee to find its natural value in the market but without undue volatility or causing unnecessary panic among investors. <\/span>State-run banks are usually instructed by the RBI to sell Dollars <\/b>in order to offer some support to the Rupee. <\/span>By selling Dollars in the open market in exchange for Rupees, the RBI can improve demand for the Rupee<\/strong> and cushion its fall.<\/span><\/p>\n

The RBI is also seen<\/span> raising benchmark interest rates <\/b>to defend the Rupee by preventing any rapid outflow of capital from India as done by it in May 2022.<\/span><\/p>\n

What are the concerns associated with fall in Rupee?<\/h5>\n

First<\/b>, forex reserves have fallen by<\/span> over US$ 50 billion <\/b>between September 2021 and June 2022. RBI officials have noted that the drop in forex reserves is due to a fall in the Dollar value of assets held as reserves by the RBI.\u00a0<\/span><\/p>\n

Second<\/b>, when the Rupee depreciates,<\/span> importing goods and services becomes costlier. <\/b>Since a large proportion of India\u2019s imports (like oil) are Dollar-denominated, these imports will get costlier.\u00a0<\/span><\/p>\n

Costlier imports, in turn, will widen the trade deficit<\/strong> as well as the current account deficit<\/strong>, This will put further pressure on the exchange rate.<\/span><\/p>\n

The Ministry of Finance has hinted that<\/span> India\u2019s fertilizer subsidy bill <\/b>for 2022-23 (FY23) could rise to around INR 2.5 trillion against Budget Estimates (BE) of INR 1.05 trillion (almost 2.5 times). The rise is because of a global supply shortage in the midst of war in Ukraine and rising exchange rates.<\/span><\/p>\n

\"India's<\/p>\n

Source: The Times of India<\/em><\/p>\n

Third<\/b>, since Rupee is not the only currency weakening against the Dollar, the net effect on exports will depend on how much has the other currency lost to the Dollar. If the other currency has lost more than the Rupee, the <\/span>net effect on exports could be negative<\/b>.<\/span><\/p>\n

Fourth<\/b>, India is <\/span>already facing high inflation<\/b> and continued depreciation may be making matters worse. Costlier imports (because of a weaker Rupee) add to the cost-push inflation<\/strong> and enhance domestic inflationary process.<\/span><\/p>\n

Fifth<\/b>, A weakening Rupee <\/span>hurts foreign investors<\/b>, who came looking for a good return,<\/span> as well as Indians, who have loans abroad<\/b>.<\/span><\/p>\n

What are the mitigating factors?<\/h5>\n

First<\/b>, the R<\/strong><\/span>upee is still more resilient<\/b> against the Dollar than it was in some of the previous crises such as the Global Financial Crisis of 2008 and the ‘Taper Tantrum’ of 2013, when the US Federal Reserve reversed ‘Quantitative Easing<\/a>‘.<\/span><\/p>\n

Second<\/b>, India\u2019s products become more competitive because depreciation makes these products cheaper for foreign buyers. This will give <\/span>a boost to domestic producers and enhance exports.<\/b><\/p>\n

Third<\/b>, the US Dollar is just one of the currencies Indians need to trade. Comparing with a basked of currencies, data suggests the Rupee has<\/span> become stronger than many other currencies<\/b> such as the Euro.<\/span><\/p>\n

Fourth<\/b>, India is still <\/span>not facing an external crisis <\/b>(or BoP Crisis). The data show that India is in a relatively comfortable position. <\/span><\/p>\n

In 2021-22, India had a trade deficit of US$ 189.5 billion. India had imported more goods (such as crude oil) than it exported, and the net effect was negative. But the Invisibles account showed a surplus of US$ 150.7 billion. As a result, the Current Account showed a deficit of US$ 38.8 billion.<\/span><\/p>\n

However, there was a surplus of US$ 86.3 billion in the Capital Account. This was driven by\u00a0<\/span>foreign direct investments (FDI) providing more Dollars in the shape of loans etc. <\/span>At the end of the year, the BoP was at a surplus of US$ 47.5 billion.<\/span><\/p>\n\n\n\n
What is the Balance of Payment Account<\/b>?<\/span><\/p>\n