Responding to Weakening Rupee

July 02, 2018
8 months

What is the issue?

  • The rupee has hit historic lows against the dollar in recent weeks.
  • It is not a huge concern, but needs a well thought-out strategy for response.

Why is it not a concern?

  • India's external accounts look far more secure.
  • This is primarily because the foreign exchange reserves are in the comfort zone.
  • They had dipped below $300 billion in 2012-13, but in 2017-18 they were $424 billion.
  • The current account deficit, too, remains manageable.
  • It is true that the long low in commodity prices is over.
  • E.g. Fuel prices are in a rising trend.

What are the proposed risks?

  • The prospect of a trade war is seen as disruptive.
  • The merchandise trade deficit has been adequately compensated for.
  • This is in part by payments for services and remittances as well as strong capital inflows.
  • However, there has been concern expressed about all those components as well.
  • E.g. threat of visa restrictions by the US administration could affect IT services revenue.
  • But the revenue from IT and ITeS has been range-bound around $70 billion.
  • Also, rising crude oil prices mean that remittances from the Gulf have rebounded as well.
  • These fundamentals of the macro-economy appear to be strong, ruling out the risks.

What should India be prepared for?

  • Certainly, there will be increased inflationary risks.
  • The monetary policy committee of the RBI thus may be more willing to raise interest rates.
  • This might in turn hamper the nascent growth recovery.
  • In the short run, the trade deficit will also find it difficult to respond to a depreciating rupee.
  • Despite this, much of India imports, including fuel and electronics, will not be easy to substitute.

What lies ahead for India?

  • Indian rupee's depreciation is similar to what is happening with many emerging market currencies.
  • However, the consequences of rupee depreciation need a careful handling.
  • This is because, rupee depreciation is an opportunity that must not be wasted.
  • India must increase self-reliance, one way, by further indigenising India's fuel mix.
  • The government's large-scale renewable energy push should be seen as part of this effort.
  • A sustainable external account would require sustained increases in the competitiveness of Indian exports.
  • This requires domestic structural reform, which is also crucial for genuine macroeconomic stability.


Source: Business Standard

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