Indian Rupee hits its all time low against the dollar. This has become a matter of worry and concern in the sector of Indian economy.
According to recent reports, it reached the 71 a $ mark. This in turn, has prompted the central bank or the Reserve Bank to interfere in the market to soften this continuous fall.
The RBI was pushed to sell dollars to stabilize the currency market. The sharp devaluation of currency is a result of the strethening of the US dollar. This is being observed since mid April. But still, Moody Corporation, often called as moody’s. It is an American financial investment company. It still believes that the Indian economy is least to vulnerable to this currency depreciation.
Why is India least vulnerable to currency pressures?
There are a lot of reasons that make India non- vulnerable to dollar strengthening. Probably, India is among the five countries which are the least vulnerable to this pressure. Let’s find out why!!
India’s less dependence on foreign currency:
Yes, India is not very much dependent on currencies from abroad. It doesn’t use them to fund it’s debt burden. Consequently, that limits the risk of the horrible impact of depreciation.
Moderate Currenct Account Deficit (CAD):
But before everything else, let’s get to know what does the Current Account Deficit or CAD mean?
So CAD is the measure of the trade of a country (here India in our case). Here the value of its imports is greater than the exports.
Now you are probably able to understand this. Since the Current Account Deficit of India is moderate. It is unexceptional relative to GDP. This limits the risk of vulnerability. Additionally, it was largely financed by the equity inflows. This also includes the Foreign Direct Investment (FDI).
Buffer of forex reserves:
India’s significant buildup of foreign exchange reserves act as buffer. This helps to reduce the external vulnerability risk. Also India is relatively large and stable economy. It is stable with its strong domestic base. This contributes to limit the risk of currency pressure too.
Local currency debts:
India’s debts are no doubt large. Also its affordability being comparatively weak. But the average maturity of these bebts is close to 10 years. And the good news is, about 96% of them is in local currency.
Why to compare with dollar?
Here is your answer! Dollar is the currency of the USA. And USA is the greatest economic superpower of the world. So it is assumed to be a stable economy. Hence it can be believed that no significant change will be observed in its economy in the near future. So All the currencies of the world are compared to the value of the US dollar.
What is the reason and trend of this depreciation?
The escalated trade war between the US and China has paved a way for this challenge. Besides, there is high impact intensity in some sectors. Like jewellery, gems and oil see price hike. This too, is a reason behind the issue. The rise in oil price also observed. From this, it is quite clear that the CAD must contribute to this challenge.
There are still a number of reasons and trends as well. These trends are of great Value in escalation of this issue. In addition, rate hikes have made dollar assets give more return. Thereby making emerging market assets look less appealing.
owing to this, a number of Foreign Portfolio Investors have pulled out a cumulative 9.4 dollar approx, from equity and bond markets since January itself.
How will it impact the economy?
India imports a number of products which do not have any alternative, hence the weakness of currency will make these imports comparatively costlier. Crude oil being the most common example, has seen a drastic price hike in the retail market due to the same reason.
All these lead to higher rate of inflation, which will implicitly be detrimental for growth of the overall economy. Even the RBI has estimated that every 5% fall in rupee will lead to increase in retail inflation by 20 basis points.
If we deeply observe this issue, then we can clearly conclude that the students studying in foreign or Overseas Universities will also be affected badly, for they need to purchase dollars to pay their fees in return of rupee.
How will it impact the export market?
Weakened currency will offer a limited relief to the exporters. It will help the export of services more than the export of goods. Probably because the overall merchandise exports have an average import intensity of as much as 60% with limited addition of value in a number of segments.
Basically, this rupee fall has come when the developed market like the US has turned protectionist.
According to the exporters, this fall in rupee is not much profitable or helpful for their export business.
What can be done now?
If we try to think over the depreciation properly, it will provide two kinds of solution one in the long-term and the other being the short-term. Let’s know about them in a bit detail, what say? We really don’t think you won’t agree here due to any reason so let’s begin the conclusion!!
Every problem contains its solution with it. All one needs to do is to sleep over it properly. India imports those products which do not have any alternative in the domestic market. If we talk about crude oil, we find that all the petroleum products are price inelastic.
On the other hand, they contain carbon which produces large amount of pollution. But still there use has become a necessity for daily needs. Their price rise has made transportation facilities way more costlier.
Hence, it is the high time to find an economic and environment-friendly alternative to them. This is honestly the best option to stabilize the economy but will be time taking.
2. Short-term Solution:
Here comes the need of RBI to increase the inflow of it’s buffer of dollar in the market. But this should be done with consciousness and complete attention. Because this can be proved to be a bit risky solution.
Besides, OMO or the Open Market Operation can also be proved to be good solution. Here the central bank can buy government bonds and sell it to the people in the market.
In addition, the option of NRI bonds too, can work. This has been proved to be a good measure in the past.
So dear readers, this was all about the Rupee depreciation in India. This fall is especially pushed by the trade war world over. subscribe to our blog for more search articles and poetries.
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