{"id":196890,"date":"2022-07-22T19:31:14","date_gmt":"2022-07-22T14:01:14","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=196890"},"modified":"2022-07-22T19:31:14","modified_gmt":"2022-07-22T14:01:14","slug":"why-weaker-rupee-isnt-all-bad-news","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/why-weaker-rupee-isnt-all-bad-news\/","title":{"rendered":"Why Weaker Rupee Isn\u2019t All Bad News"},"content":{"rendered":"\n

Source<\/span><\/b>: The post is based on an article <\/span>\u201cWhy weaker Rupee is not all bad news?\u201d<\/span><\/b> published in T<\/span>he Times of India<\/span><\/b> on <\/span>22<\/span><\/b>nd<\/span><\/b> July 2022<\/span><\/b>.<\/span>\u00a0<\/span><\/p>\n

Syllabus<\/span><\/b>: GS 3 Indian Economy; Issues and Challenges pertaining to growth and development of the Indian Economy<\/span>\u00a0<\/span><\/p>\n

Relevance<\/span><\/b>: Macroeconomic conditions; Rupee Depreciation\u00a0<\/span>\u00a0<\/span><\/p>\n

News<\/span><\/b>: Recently, the foreign exchange rate breached the mark of Indian Rupee 80 per dollar.<\/span>\u00a0<\/span><\/p>\n

What are the real problems with rupee?<\/span><\/b>\u00a0<\/span><\/h5>\n

Why there is no reason to panic over the rupee<\/span><\/a>\u00a0<\/span><\/p>\n

As per <\/span>the dollar index,<\/span><\/b> the dollar has appreciated across currencies. Therefore, there has been depreciation of the pound sterling, the euro, and the currencies of nearly all emerging markets (EM) including the Indian rupee. However, the <\/span>Indian rupee\u2019s depreciation<\/span><\/b> has been surprisingly modest, despite the fact that the capital has been flowing out of the country at the same time.<\/span>\u00a0<\/span><\/p>\n

So, what can be done?<\/span><\/b>\u00a0<\/span><\/h5>\n

(A) Some observers argued that India can <\/span>utilise (or <\/span>sell a portion) <\/span>the <\/span>foreign exchange reserves<\/span><\/b> amounting to $<\/span>580 billion <\/span><\/b>at present.\u00a0<\/span>\u00a0<\/span><\/p>\n

Limitation of the foreign exchange intervention<\/span><\/b>\u00a0<\/span><\/h5>\n

(1)<\/span><\/b> When the central bank sells foreign reserves, then commercial banks are required to give rupees in return. Therefore, the banks will run out of liquidity. This will tighten money supply and, thereby endangering economic recovery.<\/span>\u00a0<\/span><\/p>\n

(2) The RBI can do \u201c<\/span>sterilisation<\/span><\/b>\u201d to solve liquidity crunch due to foreign exchange intervention. The RBI will buy government bonds from the banks. However, If the RBI purchases large amounts of bonds in the market, this could <\/span>push bond rates down<\/span><\/b> to inappropriately low levels, thereby endangering the <\/span>inflation target.<\/span><\/b>\u00a0<\/span><\/p>\n

(3) Since investors know that there is a limit to the <\/span>foreign exchange sales<\/span><\/b>, they will be tempted to try to purchase as much dollars as they can right now. This will further increase the pressure on the exchange rate.<\/span>
\n\u00a0<\/span><\/p>\n

(B) T<\/span><\/b>herefore, we need to go back to fundamentals and ask: Do we really want to prevent <\/span>rupee depreciation<\/span><\/b>?<\/span>\u00a0<\/span><\/p>\n

(1) The two most important <\/span>drivers of growth<\/span><\/b> for an emerging economy (EM) like India are <\/span>investment<\/span><\/b> and <\/span>exports<\/span><\/b>. However, the <\/span>Private sector investment<\/span><\/b> in India has been sluggish for several years.\u00a0<\/span>\u00a0<\/span><\/p>\n

(2) But India\u2019s last year\u2019s recovery was highly <\/span>dependent on the growth of Indian exports<\/span><\/b>. Therefore, the only <\/span>engine of growth upon which <\/span><\/b>India can rely to ensure economic recovery is the <\/span>export<\/span><\/b>.<\/span>\u00a0<\/span><\/p>\n

(3) Therefore, the government should not prevent Rupee depreciation because If rupee appreciates against other Asian currencies such as the South Korean won, the Thai baht and the Taiwanese dollar, India will lose its <\/span>export competitiveness<\/span><\/b> in the global trade.<\/span>\u00a0<\/span><\/p>\n

Limitation<\/span><\/b>\u00a0<\/span><\/p>\n

Of course, there are costs to <\/span>a weak rupee<\/span><\/b>. The <\/span>depreciation<\/span><\/b> will push up <\/span>inflation<\/span><\/b>.\u00a0<\/span>\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Source: The post is based on an article \u201cWhy weaker Rupee is not all bad news?\u201d published in The Times of India on 22nd July 2022.\u00a0 Syllabus: GS 3 Indian Economy; Issues and Challenges pertaining to growth and development of the Indian Economy\u00a0 Relevance: Macroeconomic conditions; Rupee Depreciation\u00a0\u00a0 News: Recently, the foreign exchange rate breached… Continue reading Why Weaker Rupee Isn\u2019t All Bad News<\/span><\/a><\/p>\n","protected":false},"author":10308,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[216,10496],"class_list":["post-196890","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-gs-paper-3","tag-times-of-india","entry"],"jetpack_featured_media_url":"","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/196890","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10308"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=196890"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/196890\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=196890"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=196890"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=196890"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}