Fallout of a falling rupee

The rupee has crossed the psychological barrier of 85 against the dollar, and though this was expected, it has caused some concern. It is an all-time low after a steady drop for some weeks, and the rupee is unlikely to rise soon. There are chances of the currency weakening further in the coming weeks and months. The State Bank of India (SBI) has predicted that it might depreciate by 8-10% during the Donald Trump presidency. There are situations when a weaker currency does good to the economy and sometimes, conscious policy initiatives are taken towards that. But that is not the case with India now. Both global and domestic factors have contributed to the weakening of the rupee. India’s economic growth has fallen to its lowest level in three quarters and merchandise trade deficit has widened. Most other global currencies have also been losing ground against the dollar as the US currency strengthened on the back of strong US economic data and support from the Federal Reserve. The rupee has strengthened against other major currencies like the Euro.

There are chances of the dollar strengthening and that can further impact the Indian currency. The US economic growth is better than expected and has attracted investors who have sought a safe haven in the dollar in a volatile global environment. The Federal Reserve is proactive and has its sights set on inflation data. It has cut the rates by 25 basis points but is hawkish in its outlook. The stronger dollar has impacted the rupee, and when the rupee weakens against the dollar, capital outflows from the country increase. That puts further pressure on the rupee.

The weaker rupee offers some opportunities. It provides an export advantage and could boost export-oriented industries like textiles. Incentives may be offered to such industries and suitable trade strategies can be formulated in their favour. Domestic manufacturing and productivity should be improved and reliance on imports should be reduced as they will become costlier. A weaker rupee fuels inflation as imported goods and services become dearer. The SBI has estimated that a 5% decline by the rupee will increase inflation by 25-30 basis points. The RBI will have to make efforts to meet its inflation targets and preserve foreign exchange reserves. The situation will present challenges to corporates who are dependent on imports or have foreign loan commitments. Import incomes will fall and repayment burdens will increase. RBI interventions and other measures will provide only temporary relief. The lasting solution to rupee depreciation and other global challenges is to strengthen the domestic economy by improving production and increasing exports.