Indian Rupee Depreciation and Economic Implications
Current Situation
On Wednesday, the Indian rupee crossed the 90 mark against the US dollar, having fallen by over 6% against the dollar in the past year and even more against other major currencies like the euro and pound.
Exchange Rate Dynamics
The decline in the rupee has sparked concern; however, heavy market intervention to prop up the rupee is not advised. Exchange rates act as economic shock absorbers, and a weaker rupee could boost exports amidst a challenging global scenario.
Trade Deficit and Outflows
- India's merchandise exports contracted by 12% in October, with exports to the US decreasing by 8.6% due to tariff impacts.
- Imports have surged, with gold imports rising to $14.7 billion in October from $4.9 billion the previous year, leading to a trade deficit of $41.7 billion.
- Since the start of the year, foreign portfolio investors withdrew about $17 billion, with a net FDI inflow of $2.9 billion in the second quarter.
- RBI data shows a $6.4 billion depletion in foreign exchange reserves in the first half of the year.
Monetary Policy Considerations
The RBI’s Monetary Policy Committee is meeting, with the stance that monetary policy should address inflation rather than defend the currency. With consumer price index inflation at 0.25% in October, the impact of a weaker currency on inflation is less concerning.
Policy Recommendations
- The central bank should allow a calibrated depreciation of the rupee, managing excess volatility.
- The government needs to push forward policies that enhance productivity and export competitiveness.
- Finalizing pending trade deals is essential to enhance market access.
