Rupee Depreciation Saga

Everyone everywhere is discussing about rupee devaluation for last few months.  There are so many speculations surrounding the Indian Rupee. Let’s get our hands wet in this huge ocean of economy.

Firstly, we will explore the factors which impact the value of currency. The value of any currency is dependent on many economic factors as well as other socio-political factors. To mention, these include gross domestic product (GDP), imports and exports, economic policies, foreign exchange (FOREX) reserves , foreign investments, political relations with neighbors and much more.

Higher demand for imported goods increases demand for foreign currencies that in turn weakens the domestic currency. For India, our huge greed for oil and gold is playing the lead role in driving the rupee down. This demand is also widening our current account deficit that is balance of a country’s imports and exports. If we move forward to the consequences of weakening currency, a long list can be made. Some of the important implications can be gathered as below.

• Imported products will cost more. i.e. crude oil that will result in increased fuel prices, electronic products, fertilizers, coal, heavy machinery, etc.
• Further widening of current account deficit of imports/exports
• Fiscal deficit will also increase due to subsidy expenditure by Government to control prices
• Further slowdown in economic growth
• If we look at good side then there’s at least one thing to cheer about, exporters will earn more and can export at competitive prices

The government and RBI both are trying hard to control this devaluation and implementing many controlling measures to bring back economy and rupee into strong position. In last two weeks, RBI has taken certain steps to tighten the liquidity in the market but economic condition still looks gloomy. Government has also initiated certain directives to increase FOREX inflow by opening many industries for Foreign Direct Investment (FDI).

Let’s stop here and be optimist that we will achieve growth rate of six percent for current year as hoped by our Finance Minister.

Gaurav Patel MBA(ITBM) SCIT 2013-2015