WEAKENING OF RUPEE

1. Background

THE INDIAN rupee breached the psychologically significant exchange rate level of 80 to US dollar in early trade on Tuesday.
It recoveredsomegroundtocloseat79.90.Since the war in Ukraine began, and crude oil prices started going up, the rupee has steadily lost value against the dollar.
There are growing concerns about how a weaker rupee affects the broader economy and what challenges it presents to policymakers, especially since India is already grappling with inflation and weak growth.

2. About Rupee exchange rate

The rupee’s exchange rate vis-à-vis the dollar is essentially the number of rupees one needs to buy for $1.
This is an important metric to buy not just US goods but also other goods and services (say crude oil) trade which happens in US dollars. Broadly speaking, when the rupee depreciates, importing goods and services becomes costlier.
But If one is trying to export goods and services to other countries, especially to the United States, India’s products become more competitive because depreciation makes these products cheaper for foreign buyers.

3. Prominent reasons behind rupee depreciation

Devaluation – It generally decreases the price of exports in foreign countries and provides a boost to exports by making them more competitive.
Correspondingly, the volume of imports in the domestic economy would be reduced by making imports more expensive.
But since several countries are devaluing at the same time, India is neither benefitting from their exports being cheaper abroad nor will there be a huge fall in imports.
Alternate Energy –Failure in finding sustainable domestic sources of energy to address the over-reliance on oil imports creates tremendous stress on CAD.
Inflation - The depreciating rupee is also a symptom of persistently higher domestic inflation in India.
For instance, the rupee has lost about 60% of its value in the last 10 years against the dollar in line with vastly different inflation rates between the two countries.
Ripple effects – Crude oil price hikes increase the cost of transportation of goods being transported by road, including food items, which creates ripple effects on rising food inflation in the country.

4. The aftermath effect of the Rupee fall

Rising inflation: The jump in Brent crude oil prices to 14-year highs and the ongoing conflict in Ukraine triggered the recent fall.
Plunging markets: The US Federal Reserve’s decision to tighten the monetary policy and hike interest rates has led foreign portfolio investors (FPI) to pull out Rs 168,000 crore since January 2022.

Oil and other imported components will get costlier, which will further lead to even higher inflation.
India imports nearly 80% of its fuel requirements.

Sectors most affected: Auto, real estate, and infrastructure sectors would be the worst hit whereas IT and banks will be impacted positively.
Students abroad: Travellers and students studying abroad will have to shell out more rupees to buy dollars from banks.

Export: A strong dollar is good for export-oriented companies, but bad for import-oriented industries like oil, gas and chemicals.

It is also bad for companies which pay foreign companies royalties for franchises in India
Exporters may benefit as the depreciation in currency improves the competitiveness of Indian goods and services.
However, since most of the competing currencies are also depreciating against the US dollar, the benefit could be limited.

5. Need of the Hour

A long-term plan to remove policy barriers in the promotion of export-oriented sectors needs to be framed.
Excise duties could be lowered by the Central government when crude oil prices get high, and so do the state governments in the form of VAT.
The RBI could offload large amounts of dollars and increase its supply to check the appreciation of the dollar.
Also RBI’s intervention in the foreign exchange market from time to time to manage a soft landing for the rupee has to be continued.

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