The hue and cry over the depreciating Indian rupee is well known. The Indian rupee has been riding a roller coaster for a while now. The Indian media and sundry political parties are busy trying to cash in on this golden opportunity. Why wouldn’t they? That’s what the ruling party did before the last general elections.
The rupee has lost around 12% of its value this year, making it the worst performing Asian currency. Similarly, Argentina’s currency Peso has lost 50% of its value this year and is growing weak against the dollar. This sudden loss of value has created an unsurmountable pressure over the government. its loss is mostly due to a recent international chain of events, thus leaving a very few options in the hands of government to tackle the problem. There are numerous factors responsible for the sudden depreciation of rupee. First, U.S has increased the interest rates, in addition to a decrease in corporate tax, thus making it an attractive investment destination. This has led investors to withdraw from developing economies like India, consequently leading to the strengthening of the dollar against other currencies. Second, increasing oil prices are putting an extra pressure not only on the current account but also on the rupee (more money is being paid to import the same amount of oil, also leading to inflation). Third, the trade war between the U.S and China can further weaken the rupee and raising of import duties will make these countries look for new markets. Cheap exports from China will provide a tough competition to Indian exports market hence could result in reduced dollar inflow in the country. India should also be wary of dumping by China in the country because Indian products will face a tough competition in the domestic market too, thus impacting the Indian economy.
With limited options at its disposal, the government has moved to stabilise rupee. It has decided to review the restrictions imposed on foreign portfolio investors (FPI) to attract investment in the country. It has also raised import duties on many non-essential items such as white goods. Hopefully, this help in stabilising the rupee.
Depreciation of rupee can also be helpful since it will make Indian exports cheaper in the international market thus bringing more dollars in the country and leading to a reduction in the current account deficit. This is not as simple as it looks, the rise in oil import payments can negate the effect. The oil imports might become more costly owing to recent sanctions by the U.S on Iran. As India imports a significant amount of its energy needs from Iran, it can make the imports more costly if India stops importing oil from Iran in the backdrop of U.S sanctions. In this case, India will be bereft of all the concessions Iran provides to India and hence again it will affect the rupee.
The best possible option for India to deal with this is to start increasing the exports. This will not only result in the strengthening of rupee but also a significant reduction in the current account deficit. Although, It cannot happen overnight.