Fall of Rupee 2018


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.



The rupee has witnessed a significant fall in its value over the last few months. The value of the rupee against the dollar has fallen by more than 5% in May 2018 since the beginning of January 2018. The rupee, however, is not the only currency to face depreciation. Other emerging economies like Indonesia, Argentina, Mexico and Turkey have seen a fall in their currencies. So the rupee’s fall is part of a sell-off across emerging markets.

Reasons for slide

The U.S. Federal Reserve is expected to tighten its monetary policy stance further in the coming months and years by taking steps towards slowing down the growth in U.S. money supply. This is considered the most likely reason for the sell-off.

For one, interest rates in the U.S. will begin to rise as the Fed’s demand for various assets begins to drop. The yield on 10-year U.S. Treasury Bonds has already risen to 3% from around 2% last year, amid the Fed’s increasingly hawkish monetary stance. This causes a rush among investors to sell their assets in other parts of the world and invest the money in the U.S., where they could earn higher returns.



Secondly, as the Fed begins to tighten money supply, the availability of dollars in the global market is likely to turn scarce, compared to other currencies.


Remady

One major factor determining a currency’s exchange rate is its relative scarcity vis-à-vis other currencies. Since central banks are the sole suppliers of national currencies, they can influence the value of their currencies by appropriately regulating their supply.



Another factor that determines a currency’s exchange rate is the benchmark interest rate, which can be used as a tool to directly attract capital into the country and prop up the value of its currency.
The Reserve Bank of India can affect both the money supply and domestic interest rates simultaneously through its monetary policy stance.

Yet another common way to prop up a currency is through the direct intervention of the central bank in the forex market.


Effects of Fall of Rupee

The fall in the value of the rupee means that buyers are now having to shell out more rupees to purchase dollars. The fall in the nominal value of a currency in itself does not suggest that its holders are worse off. If the real value of the dollars bought with the currency were to increase sufficiently, their effective purchasing power would still be intact. In the present case, however, the depreciation of the rupee is due to a fundamental change in investor attitude to the rupee for the worse. So it reflects a fall in the rupee’s real purchasing power.

Other Major Effects on India are-

(i) The fall in the exchange rate will push the domestic prices of imported goods. A major impact of the falling rupee can be seen on the rising import bill. Weak Rupee has made crude oil, fertilisers, medicines and iron ore, which India imports in large quantities, costlier. In fact, they impact one’s finances indirectly. For instance, since India depends on imports for a large part of crude oil it consumes, a weak rupee will influence petrol and diesel prices. Fuel being directly connected with the cost of transportation, prices of goods that are transported from one part of the country to another, such as food, are bound to rise. This will have a direct impact on the household budget.



(ii) It is a difficult time for people going abroad either for travel or studies. Students who have taken loans to fund their foreign degree are also bearing the brunt. Education loans are usually in rupees, but as students pay their expenses in a foreign currency, the cost of education and stay has increased.

(iii)The adverse impact of rupee depreciation on the FMCG sector is being caused due to higher cost of imported raw materials.

(iv)The depreciation of the rupee has considerably affected the price of the edible oil complex in a big way.

(v) The falling rupee is bad for itinerant Indians and vacationers to a foreign country.

(vi) The depreciation of rupee has impacted the automobile sector in three ways. First, input costs have risen as these companies use imported components. Second, some companies will have to pay higher royalty to foreign parent firms. Third, many have foreign currency loans in the form of external commercial borrowings and foreign currency convertible bonds.

(vii)Electronic consumer goods such as computers, televisions, mobile phones, etc, with imported components will also become costlier. International food chains which run outlets in India will lose on profitability.

(viii)The depreciating rupee has had a significant impact on India’s capital expenditure as we import a lot of equipments.

(ix)With the increased concerns of inflation rising in future due to falling rupee the scope of a CRR or SLR reduction even by RBI gets limited.

(x) It will contribute to an increase in the government’s expenditures, including on subsidies. It will also raise the cost of servicing foreign currency debt for several firms.




Monday, 14th May 2018, 06:28:51 AM

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