Explain the causes, consequences and solutions to depreciation of Indian rupee in recent times. [150 Words] (10)
The term “depreciation of the Indian rupee” describes the decline of the rupee’s value in relation to other currencies, most notably the US dollar. This indicates that more Indian rupees are needed to buy the same quantity of goods and services valued at different currencies.
Casuses
The Indian rupee has depreciated due to global and domestic issues.
Global Factors:
- Rising US Dollar: The US Federal Reserve’s tightening of monetary policy to fight inflation has strengthened the US dollar, making other currencies, including the Indian rupee, less appealing.
- Tensions geopolitical Investors have fled to safe haven assets like the US dollar due to the Ukraine crisis and other geopolitical worries, putting negative pressure on the rupee.
- Global Economic Slowdown: The rupee has depreciated as investors limit their exposure to riskier assets like developing market currencies due to concerns about a global economic downturn.
Domestic Factors:
- Expanding Trade Deficit: The rupee has fallen as India’s trade imbalance has grown.
- Capital outflows: Foreign investors are pulling cash from Indian markets due to fears about rising US inflation and interest rates, reducing dollar supply.
- High inflation: Recently growing inflation has made Indian goods less competitive in the global market and reduced rupee demand.
Consequences
- Impact on Imports: Imports become more expensive when the currency depreciates, which can raise inflation, especially for electronics and fuel.
- Impact on Exports: A weakened rupee may enhance Indian exports and economic growth by making them more competitive globally. The greater cost of imported raw materials used by export-oriented firms may counteract this benefit.
- Foreign Exchange Reserve Impact: The rupee’s depreciation can deplete India’s foreign exchange reserves, which meet its external obligations and ensure financial stability.
- Impact on Investments: A weakening rupee may deter foreign investment in India due to currency risk.
Solutions
- Reduce Trade Deficit: Promoting exports and domestic manufacturing can lower India’s trade deficit and rupee strain.
- To attract foreign investment: Improving the investment environment and addressing investor concerns can boost dollar inflows and the rupee.
- Control Inflation: Monetary policy and supply-side policies can lower inflation, making Indian goods more competitive and reducing foreign currency demand.
- To build forex reserves: Diversifying India’s export base, attracting foreign investments, and controlling external debt helps boost foreign exchange reserves and protect against external shocks.
- Promote Financial Discipline: Fiscal restraint and government borrowing reduction can stabilize the economy and rupee.
Additionally, boosting economic growth, infrastructure, and global competitiveness can improve India’s economy and make the rupee more resilient to external pressures.