Opinion: Rupee depreciation determines a careful response

WION Delhi, India Sep 12, 2018, 10.06 AM(IST) Written By: Ranajoy Sen

(Representative IMage) Photograph:( Zee News Network )

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The relative free fall of the Indian rupee (INR) is actuating economic ripples, entailing its rectification, sooner than later.  

Currency fluctuations are inherent in the economic narrative of every country. Its appreciation or depreciation may not always be encouraging or discouraging, respectively, for a country’s economy. Nevertheless, it determines and indicates requisite actions. The relative free fall of the Indian rupee (INR) is actuating economic ripples, entailing its rectification, sooner than later.  

Till date, this fiscal year, rupee has plummeted 13 per cent against the US dollar it is hovering around an exchange rate of 72/$. It has been dubbed the worst performing Asian currency, at present. Would it depreciate further in the coming months, before appreciating upward in value again?   

The downslide of the value of rupee relative to the US dollar attests the relatively growing Indian demand for the US dollar due to a rise in American nominal interest rates. Foreign portfolio investors have shifted nearly $11 billion-valued assets to the US from India. Crude oil prices are upward bound. India’s net import bill has been exceeding its total export earnings for quite some time. That has lead to a negative trade balance: the difference between export earnings and import expenditure.  

Rising import bills require increased payment in US dollar. It surges up further demand for American currency, raises its value, and consequently puts downward pressure on the value of rupee.

India follows a managed floating rate for its currency, which entails that the rupee is usually allowed its true equilibrium value in the market. The RBI intervenes only during pressing situations by releasing or accruing foreign exchange reserves to bring about a temporary stability to the value of the rupee. The ongoing scenario has raised queries whether the RBI would intervene again to prevent further free fall of the rupee as it did around in June to protect the sliding value of the rupee. The RBI’s decision is yet to be made official.  

However, country is emphasising on developmental activities. To that purpose, expenditure is proceeding apace. Earnings are also being harped upon. Even then, however, in certain crucial sectors, the level of expenditure, at this point in time, is getting past the necessary returns. That might be somewhat inevitable, but it is necessary to prevent an undue widening of the concerned breach. The depreciating rupee is a good propeller to ensure that. It ensures a reality check as regards the necessary adjustments across the economy and debt reduction. 

Once that is underway, the rupee is bound to undergo relative appreciation. Meanwhile, a depreciated rupee might help to boost exports and restrain growing import costs.  

Policy makers need to ensure that amid the debate surrounding the depreciating rupee, market confidence is not adversely affected. Appropriate adjustments from the prevailing exchange rate would ensure a balanced, stable, and bolstered-up economic growth. It might be even higher than the estimated economic growth rate of 7.5 per cent.    

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)