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Rupee Depreciation – Cause and Effects

Rupee Depreciation – Cause and Effects

By Priyamvada Jain

“Rupee depreciates by over 16% to an all time low of 61.82 against the dollar”

Well looking at the current situation of the depreciation of the Indian rupee against the dollar the questions that strike my mind are that what has caused such depreciation wherein rupee jumped from the 52 mark to 61.82 in a 4 month period and what have been the effects of such a depreciation on the health of Indian economy and the Indian industry.

Talking about the reasons for the depreciation of rupee a series of activities have led to the current scenario. Since the great depression of 2008, the Indian economy had been continuously slowing down. IIP index had been falling and the growth had been perpetually shrinking. All industries were suffering losses and the rate of unemployment in the nation increased. The basic fundamentals of the economy had been vexatious. However, Indians kept on importing from the world market. The high import of gold and crude oil in such a situation burdened the current account deficit and caused it to rise to unreasonably high level of 6.8%. This weakened the Indian position in the international arena. Foreign Institutional Investors (FII’s) lost faith in the Indian economy and started withdrawing money from the Indian markets. Foreign entrepreneurs reduced Foreign Direct Investments (FDI’s) in the Indian industry. Thus, the valuable forex which was required to finance the current account deficit did not flow in the system which further worsened the deficit. The major event that triggered the rupee to depreciate by such a pace was the statement of the US Federal Bank’s chairman Mr. Ben Bernanke wherein he expressed the unwinding of the bond purchase programme in the US. The US had been printing money to bolster its economy. Now with the revival of the economy the Chairman plans to unwind the programme. This statement led to unrest in the US economy and the US investors started withdrawing money from the overseas market. With the increased demand of dollar, the prices of dollar in the global markets rose and the prices of all other currencies weakened against the dollar, among which rupee was one. But because of the already existing current account deficit and reduced growth the Indian currency was badly hit. Rupee came to an all time low of 61.08 against the dollar.

This depreciation of the Indian rupee has impacted the government, the industry and the individuals of the nation. With the depreciation of rupee the imports have become costlier and thus importing crude oil becomes a burden. With every single value fall a burden of Rs.9000 crores is created on the government in the form of subsidy. This has caused the fiscal deficit of the government to increase. At the industry level the cost of borrowing has been increased for the companies which had taken foreign loans. The increased liability has burdened companies which now resort to retrenchment to cut down expenditure. This has led to unemployment in the economy. Further with depreciation, the prices of imported raw material and technology have increased which has caused the overall costs of the companies to increase. At the individual level the prices of all imported goods have increased. Students going broad to study now have to shed 20% extra for every dollar. This has caused the cost of foreign studies to increase which burdens the Indian families.

The Government of India, RBI and the Finance Ministry have taken a lot of measures to solve the menace. The import duty on gold has been raised to 8% against the original level of 2% to curb the imports of gold in the nation. According to P Chidambaram India has imported 1017 tonnes of gold in 2013 and he targets to bring it down to 700 tonnes. The interest rates have been increased by the RBI governor to reduce the supply of rupee in the market. This will also ensure that the much needed foreign investments flow in the economy and inflation is checked. RBI also announced open market operations of 12000 crores to restrict the supply of Indian rupee in the market. Government also plans to increase the cap of FDI in various sectors like insurance, defence and retail to attract foreign investors. The conditions which were imposed on Walmart to enter India have now been withdrawn by the government so that it enters India as soon as possible and bring with it the direly required FDI. The finance ministry is also considering the option of bond issue so as to arrest dollars from the market.

Well, according to me apart from the measures already taken the government should now concentrate on increasing exports. SEZ’s and export houses should be given liberations so that they can sell their product in the market. Loans should be made cheaper for these organisations so that there cost of borrowings reduces enabling them to produce at competitive rates. Power and fuel costs should be reduced for them so that their overall cost of production falls. Further special tax rebates should be given to them. These measures will ensure that the Indian goods become cheaper in the international market which will hence trigger the exports of the Indian products. The government should ensure that trade mispricing is controlled and no one indulges in over or under invoicing to earn superior profits. Proper system should be implemented to by the ministry to keep a check on it. Further, the smuggling of gold should be checked in the nation as with the increase in import duty the act of smuggling has increased. Custom officials should become stricter with the norms and the various regulations.

The rupee menace should be systematically tackled by the Indian government and RBI or else it will soon cause the Indian economy to break down. The world will lose faith on the nation and the entire industry will suffer a huge a setback.

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