On Oct. 09, the rupee closed below the Rs74.3 per dollar mark for the first time ever. The news that the Indian economy grew at a sprightly 8.2% in the April-June period, the highest in nine quarters, provided some cushion
As we know that the value of rupee against the dollar is continuously depreciating. Today you all will get to know why is it happening and this is an important thing that every Indian should know.
Here are some reasons for the rupee’s incessant slide.
In International Trade, the US dollar is the main currency and to pay imports’ bill, India needs to buy a dollar. This increases the demand of dollar in the market. Hence when the imports are more than exports, then there is a need to buy more dollars to pay the imports’ bill while on another side due to lesser exports, India is earning fewer dollars. Currently, the outflow of dollars is greater than the inflow. This thing is not good for Indian Rupee.
In the past many weeks, international crude oil price, which had stabilized in the April-June quarter, has been on the rise again. Currently, the crude oil futures were trading above $80 per barrel. Considering that India imports nearly 81% of its fuel needs, rising oil prices leads to a higher dollar bill which, in turn, weakens the rupee.
Current account deficit
When a country’s import is more than its export then it is called as Current account deficit. Current account deficit is bad for any country’s economic progress. Rising oil prices and a weakening rupee mean that India’s current account deficit may widen to 2.8% of the GDP this financial year, up from 1.9% last year. This year, the deficit has already jumped to a nearly five-year high of $18 billion. Besides Crude oil, India heavily imports electronic goods. Also, compared to the imports, India exports lesser goods. This only adds further pressure on the rupee.
The situation in Turkey is taking a toll on currencies of the emerging markets. The Turkish lira has already lost over 40% of its value this year. Last month, the US imposed higher tariffs on imports of steel, aluminium, and other commodities from Turkey. Besides the US-Turkey confrontation, there is also the bigger US-China trade war brewing. The two countries have also been increasing duties on each other’s goods. Some observers view this as the beginning of a new Cold War. This situation increases the value of goods in the international market and this leads to an increase in India’s imports bill and hence depreciation of rupee.
Typically, when the rupee weakens, the Reserve Bank of India sells dollars from its reserves to rescue it. So far, though, the Reserve Bank of India (RBI) has not intervened aggressively to shore up the domestic currency.
But this time, the intensity of RBI’s intervention has dissipated. While there is complete lack of communication between RBI , officials from the government and quasi-government agencies .
The dollar is having a good run this year due to an uptick in the US’s GDP numbers. That country’s economy grew 4.1% in the second quarter of this year, the fastest since late 2014. It has also been adding more jobs, while average wages have picked up, too.
By all indications, most of these global cues are unlikely to change much in the immediate future. So businesses and individuals in India need to brace themselves.
– Abhishek R. Pawar