Understanding the Fall of the Rupee
The rupee's exchange rate recently fell below ₹90 a dollar, raising questions about the reasons behind the fall, its implications for the Indian economy, and whether this should be a cause for alarm.
Reasons for the Rupee's Fall
- Negative fundamentals: Increased trade deficit, higher current account deficit, and negative foreign portfolio investments (FPIs).
- Forex reserves decline.
- Tariff-related expectations regarding an India-U.S. trade deal that hasn’t materialized.
- Limited intervention by the Reserve Bank of India (RBI) to manage forex market volatility.
- Ongoing portfolio outflows increasing the demand for dollars.
- Higher import growth compared to export growth.
- Uncertain tariff agreements impacting investor sentiment.
Does a Falling Rupee Indicate Economic Weakness?
- No correlation with economic weakness.
- Robust GDP growth and performance.
- Strong balance of payments and adequate forex reserves covering 11 months of imports.
- Economy’s fundamentals remain strong with robust growth, benign inflation, and fiscal consolidation.
Potential Benefits of a Falling Rupee
- Theoretical benefits include enhanced competitiveness for exports.
- Depreciation may offer a price advantage against high tariffs.
- Limited inflation impact due to low CPI components' dependency on imports.
- Exporters benefit through better realizations and may offer higher employee bonuses, boosting consumption.
