By Categories: Economy

Context :- The rupee seems to be on a trajectory of decline, with its value relative to the dollar (as per the Reserve Bank of India’s reference rate) falling from Rs.76.4 at the beginning of April to Rs.79.1 at the beginning of July.


Cause:- 

  1. India’s trade deficit has increased in recent months as export growth remained sluggish and imports registered a sharp increase (In June, with exports estimated at $38 billion and imports at $63.6 billion, the trade deficit rose to a new high of $25.6 billion)
  2. Foreign portfolio investors are pulling out of Indian equity and debt markets.
  3. High inflation across the world resulted in significant increases in policy interest rates by the US Federal Reserve and other developed country central banks, thus investors are booking profits that accrued over a two-year boom in Indian markets and exiting the country now.
  4. Spike in oil prices following the Ukraine invasion, which has inflated the import bill, and restrictions on exports for India.

However, there is another observation:-

  1. Even as the rupee has depreciated vis-à-vis the dollar, it has actually strengthened against other hard currencies such as the euro and the yen

Thus, Duvvuri Subbarao, a former RBI Governor advocates:-

  1. The RBI should lean towards non-intervention rather than intervention, and allow the rupee to gradually depreciate.
  2. And it should not be a cause of worry as forex reserve is around $600 billion.

Nonetheless, there are some causes to be worried about:-

  1. High import bill is not on account of higher oil prices alone but also because of increased imports of commodities varying from gold to coal.
  2. Coal Crisis:- Coal imports were unavoidable because stocks with the thermal power plants had touched unsustainable lows, raising concerns about large-scale power outages
  3. India’s coal crisis is the result of the failure of policies aimed at restraining the public sector’s role in coal production and getting the private sector to step in.
  4.  While the objective of curbing public sector growth worked, the drive to get the private sector to fill the gap was a failure

Conclusion:-

In recent years there were three episodes of sharp rupee depreciation: in August 2019, March 2020, and over May-June 2022. In all three instances, a common and important driver of the depreciation was the outflow of capital.

Seen from this angle, the recent and rapid depreciation of the rupee vis-à-vis the dollar does give cause for concern. The drivers of the depreciation are not all short term. The trade deficit threatens to remain high for quite some time. And the excess inflow of capital that propped up the rupee even when deficits widened has all but dried up.


 

Share is Caring, Choose Your Platform!

Recent Posts

  • Darknet

    Definition:

    Darknet, also known as dark web or darknet market, refers to the part of the internet that is not indexed or accessible through traditional search engines. It is a network of private and encrypted websites that cannot be accessed through regular web browsers and requires special software and configuration to access.

    The darknet is often associated with illegal activities such as drug trafficking, weapon sales, and hacking services, although not all sites on the darknet are illegal.

    Examples:

    Examples of darknet markets include Silk Road, AlphaBay, and Dream Market, which were all shut down by law enforcement agencies in recent years.

    These marketplaces operate similarly to e-commerce websites, with vendors selling various illegal goods and services, such as drugs, counterfeit documents, and hacking tools, and buyers paying with cryptocurrency for their purchases.

    Pros :

    • Anonymity: Darknet allows users to communicate and transact with each other anonymously. Users can maintain their privacy and avoid being tracked by law enforcement agencies or other entities.
    • Access to Information: The darknet provides access to information and resources that may be otherwise unavailable or censored on the regular internet. This can include political or sensitive information that is not allowed to be disseminated through other channels.
    • Freedom of Speech: The darknet can be a platform for free speech, as users are able to express their opinions and ideas without fear of censorship or retribution.
    • Secure Communication: Darknet sites are encrypted, which means that communication between users is secure and cannot be intercepted by third parties.
    •  

    Cons:

    • Illegal Activities: Many darknet sites are associated with illegal activities, such as drug trafficking, weapon sales, and hacking services. Such activities can attract criminals and expose users to serious legal risks.
    • Scams: The darknet is a hotbed for scams, with many fake vendors and websites that aim to steal users’ personal information and cryptocurrency. The lack of regulation and oversight on the darknet means that users must be cautious when conducting transactions.
    • Security Risks: The use of the darknet can expose users to malware and other security risks, as many sites are not properly secured or monitored. Users may also be vulnerable to hacking or phishing attacks.
    • Stigma: The association of the darknet with illegal activities has created a stigma that may deter some users from using it for legitimate purposes.