011 2618 4595

Fall of rupee

The long-time stable rupee has suddenly started declining in the past few months, due to which there is an atmosphere of worry. Significantly, the exchange rate of rupee and dollar was Rs 75.30 per dollar on 6 December 2021, which has reached Rs 76.74 per dollar on 25 April 2022 and 78.2 per dollar on June 12 2022. Though at the beginning of Covid19 (April 2020), this exchange rate was Rs 76.50 per dollar, which improved to around Rs 74.00 per dollar by January 11, 2022. But the recent depreciation of the rupee has wiped out all that gain. But this is a fact that the dollar is still only about 2 percent above the April 2020 level. Inflation has been increasing all over the world for some time now. Significantly, in the month of April, the rate of inflation in USA, England and the European Union stood at 8.3%, 7.0% and 7.5% respectively. In the same sequence, the rate of retail inflation was recorded in India at 7.79% in the month of April, which is considered to be much higher than the rate of inflation in the last 4-5 years. The depreciating rupee can further aggravate the problem of inflation in the country. According to a report by Michael Patra, Deputy Governor of the Reserve Bank of India, a one percent fall in the rupee can increase our inflation by 0.15%, the effect of which can be seen in the next 5 months. Understandably, India imports petroleum products in large quantities, and international crude oil prices have risen significantly over the past few months. The depreciation of the rupee, therefore, could further push up petroleum prices in India, leading to higher cost for raw materials, industrial fuels, transportation, etc.

History is witnessing that high inflation also adversely affects growth. This is because in order to contain inflation on the one hand and also to keep the real interest rate positive on the other, the Reserve Bank has to increase the repo rate (the rate at which banks borrow from RBI). A rise in interest rates makes the growth trajectory more difficult, as it adversely affects consumer demand, business and infrastructure investments. Whenever the rupee starts depreciating, speculators also start making tricks and through their activities create artificial scarcity of dollars in the market. In such a situation, when speculators and market forces in the market try to weaken the rupee, the Reserve Bank intervenes in the foreign exchange market in view of its obligation to contain inflation, create the necessary environment for monetary stability and growth and if necessary, intervene in the foreign exchange market. Sale of dollars from foreign exchange reserves increases the supply of dollars in the market and therefore solves the artificial scarcity of dollars created by speculators in the market. There are always two types of opinions about the value of the rupee. One type of experts is of the view that with time depreciation of rupee is inevitable, and hence there is no need for the Reserve Bank to stake its valuable foreign exchange to hold the value of rupee, as it will deplete foreign exchange reserves and rupee will keep depreciating. So, the rupee should be left on its own fate. The logic of such experts is that the rate of growth of imports in India has always been higher than the rate of growth of exports, so the additional demand for dollars will continuously push up the value of the dollar. Their argument is also that whenever crude oil prices rise, the rupee will definitely depreciate.

The second type of experts is of the view that additional demand for dollars occasionally arises and the situation becomes normal again. In such a situation, to avoid the market forces to bring long-term depreciation of the rupee, the intervention of the Reserve Bank in the foreign exchange market is important. In the past too, the sale of dollars by the Reserve Bank from its reserves has helped to stabilise the rupee. When the situation returns to normal, the Reserve Bank replenishes its foreign exchange reserves by buying dollars again. Therefore, efforts to stabilize the rupee do not lead to any loss of foreign exchange reserves in the long run.

The question is whether a gradual depreciation of the rupee is inevitable or it is impossible to formulate a strategy to strengthen the rupee. For a long time, the policy of free trade has been adopted by the governments and imports were allowed at least import duties. Due to the dumping of imports in the country by many countries including China, not only our trade deficit increased in an unprecedented manner, our industries were also adversely affected and our dependence on imports increased. Simultaneously. The increase in the trade deficit had a direct impact on the demand for dollars and caused depreciation of the rupee.

In the last almost two years, many efforts have been made by the government, to make India self-reliant, due to which our dependence on imports can be reduced in the coming time. The results of the self-reliant India scheme are now getting visible, and process has initiated for encouraging domestic production of many types of products, including raw materials for pharmaceutical industries, semiconductors, electric vehicles, telecom products and many others. A decrease in imports may reduce the demand for the dollar. On the other hand, due to India buying crude oil from Russia and paying it in rupees, there may be further reduction in the demand for dollars and the result will be seen in the form of appreciation of the rupee.

Share This