Rupee crisis in Indian and reason of fall Indian currency.

Rupee Crisis In India
Rupee Crisis In India

Rupee Crisis In India-

In 1947, one rupee was valued to one dollar . There’s another theory, though -that one dollar was, in fact, equivalent to Rs 4 Since the Indian currency then was pegged to the British pound sterling. Over the decades, the rupee has been on a roller coaster ride until mid-October, when it plunged to an all-time low of 74.48 against the Us dollar.

Reasons of Fall-

Reason Of Fall Indian Rupee
Reason of Fall Indian Rupee

For three years, the rupee defied conventional wisdom to grow steadily, until the big fall this year -a 15 per cent drop in calendar year 2018. The rupee has weakened despite the RBI pumping in $25 billion into the market this year. The central bank usually sells dollars from its over $400 billion foreign exchange reserves in order to defend ‘ the currency.

The fall in the rupee can be primarily attributed to global factors. One, rising crude oil prices, primarily because of US sanctions on Iranian exports and a drop in Venezuela’s production. India, which imports over 70 per cent of its oil needs, spent USD 87.7 billion or Rs 5.65 lakh crore on importing 220.43 million tonne (MT) of crude oil in 2017-18. A costlier import oil bill meant the currency taking a further hit.

The double whammy of a weak rupee and higher crude oil prices has led to a sustained rise in fuel prices in India, with petrol prices crossing Rs 90 per litre in several cities.

Second, the dollar has been strengthening thanks to a robust economic recovery, in the US. The US Federal Reserve’ 3 steady hike in interest rates has made investments in US treasuries more attractive, thus resulting in funds moving out of emerging markets such as India.

A fall in the currency impacts the common man as prices of fuel, imported items, goods produced in India with raw materials imported from abroad, are likely to go up. But a weak currency also boosts exports. But India’s twin deficits . -a widening current account at $45. 7 billion for the quarter ended June 2018 as compared to $41.9 billion a year ago, according to the RBI data; and a growing fiscal deficit (excess of government spending or borrowings over revenues) -mean that the currency ends up taking the hit.

A slide in the rupee should keep firms who export happy as their products become more competitive as is often the ease with textiles, leather, gems and jewellary. Besides, individuals receiving funds from abroad stand to benefit. Also, the stocks of Indian software companies, which bill their clients in foreign currency, tend to head northwards when the rupee tumbles. Thus, a depreciation of the currency has been advocated in the past by some to boost export growth .

However, it may not be that simple. “Efforts to lift exports and contain imports Will help to correct trade imbalances. It is believed that a weaker rupee versus the US dollar is a boost for India’s trade competitiveness. However, a weaker rupee is an ineffective and insufficient driver to boost exports. The experts argue that some depreciation in line with other currencies is essential to keep India 's exports strong. Export sectors such as ready-made garments have been declining for more than a year, falling over 12 per cent during the April-August period. The US has challenged India’ 8 export subsidy regime at the WTO, making it difficult for the government to come out with more sops for exports. Which means, exporters  are not quite celebrating.

Turbulence In The Past-

turbulence in the past indian rupee balance
Turbulence In The Past 

In 1966

the Indira Gandhi government devalued the rupee n-om 4.76 to 7.50 against the dollar, a depreciation of 57.5 per cent, under pressure from multilateral agencies as the dollar-rupee rate remained constant amid a rise in foreign aid, drought and wars with Pakistan and China.

In 1991

The rupee was devalued by 18.5 per cent to 25.95 in a two-stage devaluation by the Narasimha Rae govt to tackle the foreign exchange crisis, inflation and possibility of e default on external payment.

In 1998

the rupee depreciated continuously during the crisis period and reached a low of 42.76 per vs dollar in August 1998, a depreciation of 16 per cent in the wake of the Asian financial crisis and downgrading of India‘s rating after the Pokhran explosion. The Reserve Bank stepped in and sold dollars, hiked cash reserve ratio (CrR), repo rate and bank rate, and the bank rate, and reduced access for banks to export and general refinance facility.

In 2008

The rupee depreciated sharply by 21.5 per cent from 39.99 in end-March 2008 to 50.95 at end-March 2009 when the global markets were hit by the US mortgage crisis triggered by the fall of Lehman Brothers. The RBI announced a rupee-dollar swap facility and liberalised foreign borrowings to stabilize the rupee.

In 2011

the currency depreciated by about 17 per cent during August to mid-December of 201 l, reflecting global uncertainties, especially the deepening Eurozone crisis. The RBI responded by deregulating interest rates on rupee-denominated NR1 deposits and hiking the ceiling on FII investment limit on govt securities and corporate debt.

In 2013

The rupee depreciated sharply by around 19.4 per cent against the US dollar between May 22, 2013, when it stood at 55.4 and August 28, 2013, when it touched a historic low of 68.85 on the back of reversal in capital inflows, high CAD, deceleration in gross domestic product growth rate, high WPI inflation and large fiscal deficit.

In 2018

From an intra-day high of 63.44 on January 2, the rupee fell 15 per cent to 72.98 against the dollar in the September end, a fall attributed to crude oil price rise, the United States-China trade war, rate hike fears and weakness in emerging market currencies.

India’s current account deficit (the country runs a higher import bill than what it earns through exports) could have been bridged was through portfolio inflows to Indian capital markets -or money which foreign funds deploy to buy stocks or debt of Indian firms. However, that is an uphill climb since foreign portfolio investors (FPIs) have been pulling out funds.

Since this was occurring at a time when India’s current account deficit was widening (for reasons discussed earlier), the pressure on the rupee has increased, resulting in its sudden decline. Declines of large magnitude spur speculation, with exporters and others increasing their holdings of dollars in the expectation of a steeper depreciation, which then realises itself. Given the obvious links between trade and capital account liberalisation and this vulnerability, measures to address the crisis must seek to stop the foreign exchange bleed rather than find suspect ways of increasing capital inflows to compensate for the outflow. But measures to woo reluctant foreign investors, incentives to borrow for domestic agents and mere promises of import curbs are all the government has to offer, pointing to the fact that its neoliberal commitment has trapped it in a vulnerability of its own creation. Meanwhile, firms that have borrowed in dollars, and are inadequately hedged, are beginning to feel the strain as the debt-servicing burden in rupees rises steeply. Defaults and bankruptcies are a real danger. As and when they occur, the asset deflation that would follow would rein in investment and growth, even as rising import costs stir up inflation. “Stagflation” is a real possibility, at a time when the government is still battling a veritable currency crisis.

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