Sep 1 • Group Discussion • 3963 Views • 2 Comments on Impact of Rupee Depreciation On Indian Economy
The Indian rupee hit new historic low level of 68.75 against the US dollar in intraday trade Wednesday on sluggish local stocks which made us to move from bad to worse which in turn has racked up several macroeconomic issues like corporate earning, slow economic growth & market volatility. It has been predicted that ruppee may slide to 70 to the dollar in a month. RBI declared Stern measures on 14th aug inorder to tackle the outflow of foreign currency which also includes control on Indian firms investing board and on outward remittances by resident Indians. Whether currency will be able to find its stable level or will continue to go down further is a mystery.Rupee has weakened which means we need to spend more rupees to get that dollar. This topic “Impact of rupee depreciation on Indian economy” is the most important & latest topic for group discussion.
Reasons of Indian rupee decpreciation against Dollar:-
- Because of growing economic momentum Dollar strength is also increasing. Thio Chin Loo,
senior currency strategist at BNP Paribas told NDTV that Dollar showed up boost in its value in the back of US rising yields.
- Indian Economy getting exposed to the risk of sudden stop and reversal of capital flows due to widening of trade deficit. For example if the U.S. Fed withdraws its bond buying programme, there might be sudden outward flow of money which will leave India scrambling for dollars. The current situation has become more volatile due to the slowdown of Indian economy as government is not successful in generating heavy capital inflow. India’s current account deficit is equivalent to 6.7 per cent of GDP in December.
- Due to weakness in domestic equities, foreign institutional investors sold index futures which affected rupee.
- Increasing in import bill as oil account 35% and gold account 11% of India’s trade bill. According to traders there is a continuous demand for the greenback from oil importers which in turn pushes the rupee lower. In a similar manner fall in price of gold have offset the government’s and bank’s move to reduce import of gold, which in turn increases current account deficit.
- Weak economic fundamentals & no signs of quick solution are creating a pressure on rupee. The UPA govt have to deliver far reaching reforms in order to generate heavy capital inflows as per expert suggestions.
Impact of rupee depreciation on Indian Economy :-
- Importers will be affected the most as they will have to pay more rupees on importing products. On the contrary to this exporters will be delighted as goods exported abroad will fetch dollars which be converted to more rupees. Also, a weak rupee will make Indian produce more competitive in global markets and that will be fruitful for India’s exports.
- Cost of imported goods will become more. For example if you bought a product vauled USD 1, that means you paid around Rs 58 for that around a month ago but now you will get that same product for Rs 68
- Oil marketing companies will also feel the pressure of weak rupee which in turn will be passed
on to the consumers as the companies are allowed to do so following deregulation of petrol and partial deregulation of diesel. Incase OMCs increases fuel prices, there will be a considerable increase in overall cost of transportation which will lead to inflation.
- If this depreciation in rupee continues, RBI will have very less room to cut policy rates which in turn will add to the borrower’s woes who are waiting to get rid of high loan regime.
- Students who are studying abroad have to bear the burnt of depreciating rupee. Expenses towards the university/college fee as well as that of living will increase, thereby spelling a huge burden on the students.
- Indian rupee depreciation will also affect the tourism. Incase you are planning to spend your holiday abroad it will affect you as your travel charges as well as hotel charges will increase drastically, excluding shopping and other miscellaneous spending activity.
- Depreciation of rupee is definettly a good news for the overseas Indians as those who are working abroad will gain more on remitting money to their homeland.
- Country’s fiscal health will be affected as a frail rupee will add fuel to the rising import bill of the country and thereby increasing its current account deficit (CAD).A widening CAD will definetly pose a threat to the growth of overall economy.
- Car companies are already revising their prices as they are dependent on several things like imported raw material, borrowings in foreign currency, pay royalties to their parent firms and have loans. Consumers of imported paperbacks and gizmos should be ready to pay more. Marketing companies will absorb the increase in cost but there might be cases when the consumer may have to bear the brunt.
- There will be shrinking of pay packages. Industries that depend on imported raw material will cut costs by two ways either by reducing salaries or human resources. This wont affect them those who are paid in dollars.
In my opinion this particular scenario would bring a disruptive correction in India’s growth, with all components of growth which includes investment, exports, consumption and government spending, suffering.
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