The rupee is under pressure: it has fallen 3.5% against the dollar in 2022 and touched record lows. The reason is two-fold: One, the Russia-Ukraine war, and two, the expected hike in US interest rates. Mint examines the state of the rupee.
What is currency depreciation?
When a currency’s value against other currencies weakens through market forces—that is, demand for and supply of foreign currency —it is called depreciation. On the other hand, if it is weakened through administrative action, it is devaluation. While the process is different for depreciation and devaluation, there is no difference in terms of impact. India used to follow the administered or fixed rate of exchange until 1993, when it moved to a market-determined process or floating exchange rate. China still adheres to the former.
What factors impact currency fluctuation?
It depends on the net inflow and outflow of foreign currencies because of external trade, foreign investments, two-way travel, two-way remittances by expatriates, and receiving and providing foreign loans and aid. The actions of foreign institutional investors (FIIs) have been the major cause of the rupee’s fluctuations since mid-1996, when India opened up its capital markets. The recent depreciation is because US federal reserves rates are expected to be raised soon, leading to withdrawal of FIIs from Indian markets, and also because of the Russia-Ukraine war. High oil and commodities prices are also a factor.
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What has been the trend in the rupee’s external value?
The rupee, which opened at a record low of ₹76.984 on 8 March, was steadied by the central bank’s timely $5 billion swap auction on the same day. In 2022, it has depreciated by 3.5% against the dollar. The financial crisis of 2008, the euro zone debt crisis of 2011-12, and the taper tantrum of 2013 are some instances of significant depreciating pressure on the rupee.
What does a weaker rupee mean for trade?
In a normal situation, depreciation of domestic currency helps boost exports. The Reserve Bank of India has also avoided market intervention to aid exports. Indian imports have been adversely hit, whether it is of crude oil or other crucial items. Considering Organization of the Petroleum Exporting Countries’ basket price at $127.93/barrel, the landed price of crude oil on 8 March 2022 increased to ₹9,836.53 per barrel ($1= ₹76.89) as against ₹9,657.81 per barrel ($1= ₹75.49) as of 28 February 2022.
What is the impact on the overall economy?
The current account deficit is bound to widen, depleting foreign exchange reserves and weakening the rupee. With higher landed prices of crude oil and other crucial imports, the economy is definitely inching towards cost-push inflation. Oil marketing companies may not be allowed to fully pass on the burden of high cost of sourcing to people, which affects the government’s dividend earnings, raising a question mark on budgeted fiscal deficit.
Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.
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