Weakening Rupee and the Indian Economy By Anurati Bukanam from Amity Law School, Mumbai
One of the economic problems India is facing today is that of its vulnerable Rupee. Indian currency has been depreciating for a long time now and this is bound to affect our economy in many ways.
The Indian Rupee has fallen in value against a basket of currencies since the Independence in 1947. Since then, the Rupee has continued to depreciate, falling to a major low in 2013,
65 Indian Rupees for 1$.
A major question is what does this devaluation really mean for the Indian Economy?
India, among other countries is a current account deficit nation. The imports of the country outnumber the number of exports. With the continuing devaluation of the Rupee, India earns more because the dollar is costlier. However, because of the imports dominating the market it also loses more than before. The rupee depreciation particularly hits the industrial sector and puts higher pressure on items like oil, imported coal, metals and minerals and imported industrial intermediate products.
A weak Rupee is destined to affect the economy in several ways.
First, high inflation which has been running into double digits now. Higher oil import costs could translate into higher fuel costs, which will raise, or at least keep the pressure on the overall cost of economic activity [i], shifting the burden of higher fuel costs on the consumers. A falling currency will also compel the RBI to increase policy rates. No cut in policy rate will add to the borrower’s woes who are eagerly waiting to get rid of the high loan regime. If RBI cuts rates further, the interest rate arbitrage (between Indian government bonds and US Treasury yields) becomes less attractive, thus compromising the possibility of further capital flows.
Finally, depreciation will help boost the domestic demand, increasing the exports and forcing consumers to shift to domestic products rather than the imports, causing a demand-pull inflation.
Secondly slower economic growth. The falling Rupee is making the domestic and international investors unsure and nervous to invest in India. As foreign investment in India dries up, the gap between the needed investment and the actual investment widens. Foreign investment is at risk when local currency fails, tapering both debt and equity as the investors predict a further depreciation. All of this will just shoot up the Capital Accounts Deficits[ii]. Among all this unemployment shall also find its way with the slower rate of economic growth. Creating more problems for the country.
The Corporate sheets will be stretched as the burden for debts taken for loans and projects will increase. And as these loans mature, the cash flows will be impacted.
The falling Rupee often coerces the companies to also increase costs as the cost of imports increase. Failure of a similar rise being experienced in the prices of exportable commodities is going to result in widening of Current Account Deficit of the country.
Fourthly, Oil importers and marketing companies, who import their major raw material crude oil, have the most to lose out on. The loses from subsiding prices through the public distribution system will climb further. Increasing by 9,500 crore every year, with the fall in the Rupee.
Consumers will be directly impacted by all these changes. Transportation costs will increase due to the crude oil price rise, adversely affecting foreign travel and overseas education. The major impact of this will be felt by students abroad, they shall suffer the increase in the standard of living and expenses of the university fee.
Essential goods will also inflate, making it difficult for the common man to make ends meet, with the country on the verge of having more unemployed in their homes.
Lastly, Foreign Investments in stock markets have also taken a major setback. FII are unsure about the stability of the economy and are awaiting to take their money out of the market, thus resulting in less inflow of Dollars in the country. Decreased in supply and increase in demand of dollar will also lead to strengthening of the Dollar against the Rupee.
Apart from these negative impacts, India is also bound to face some positive impacts. Exporters shall benefit from the feeble Rupee, bringing delight to the exporters who will get paid more. It will also help make Indian products more competitive in the global market and be fruitful to its exports. Overseas Indians can gain more on remitting to India. Also, Mutual Fund Investors who invested in the US will gain up to 37% returns from the feeble Rupee. IT Industry also looks to benefit in the short run as the foreign investments in the industry will intensify making it cost-competitive. Tourism will also flourish as inflow of foreign tourists will increase making India a cheaper destination.
Therefore, there are negative and positive influences of the weakening Rupee. However due caution and care will be taken by our policy makers to ensure a better future of the Indian economy.
Disclaimer: The opinions expressed in the articles or any other publication are those of the authors. They do not purport to reflect the opinions or views of the Educoncours or its members.