The Crash of the Rupee
The Crash of the Rupee Thu, 17 May 2018

The Crash of the Rupee

If PM Narendra Modi could spare any time from the 24/7 election campaign which he seems to be addicted to, we urge him to take a long, hard look into the state of the Indian economy. The Indian rupee has crashed below the 68/$ mark and this raises serious concerns.

When trade becomes important for a country’s growth, exchange rate also becomes important. The exchange rate is the rate at which one currency is exchanged for another. Currently, the currencies of most of the emerging economies are on a downfall. This means with respect to these currencies, rupee being one amongst them, the dollar is becoming more expensive. When the dollar becomes more expensive, it affects our trade as imports become more expensive, domestic industrial production gets affected which reflects on the exports and investments get affected, altogether leaving imprints on India’s growth. There is a global factor affecting the fall in the value of currencies of all emerging economies and that is accrued to the monetary policy of US. Apart from the global factor at play, the question is why is the Indian rupee the worst performer of them all?

One of the reasons is the higher oil prices. Being the third largest oil consumer, change in international prices of oil affects our economy. Along with that, compared to 2017, oil import of India has risen by 41%, pushing our current account deficit to a three-month high, thus burning a hole in our foreign exchange reserve. Another reason is the capital outflow from debt and equity markets which stood at around Rs 17,096 crore this year. One primary way to address this outflow is via inflow of foreign exchange which is driven by exports. But exports in India have been facing a slowdown due to the twin failure of demonetisation and GST. While 2018 proves to be a difficult year due to international economic decisions, India couldn’t capitalise on the positive trends of the  international market during 2017-2018 due to rolling fallout of both GST and demonetisation.

With a weaker rupee and higher oil prices, there is the looming danger of inflation. This comes along with the danger of a  change in US's economic policies and our widening trade deficit It is upon the RBI and the government to manoeuvre the country through these difficult times.