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Why Indian Rupee Is Sliding

The Indian rupee has been sliding against the US dollar, making it one of the worst performing currencies in Asia. This is due to a rising current account deficit which has increased pressure on the rupee. The current account deficit is expected to widen to 2.8% of GDP for the 2018-2019 financial year. Other factors contributing to the rupee's depreciation include rising oil prices, foreign portfolio investors pulling money out of India, and global trade tensions. To stabilize the falling rupee, the Indian government has implemented measures like import restrictions, relaxing rules for foreign investment, and increasing access to loans for manufacturing firms.

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akanksha sharma
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81 views

Why Indian Rupee Is Sliding

The Indian rupee has been sliding against the US dollar, making it one of the worst performing currencies in Asia. This is due to a rising current account deficit which has increased pressure on the rupee. The current account deficit is expected to widen to 2.8% of GDP for the 2018-2019 financial year. Other factors contributing to the rupee's depreciation include rising oil prices, foreign portfolio investors pulling money out of India, and global trade tensions. To stabilize the falling rupee, the Indian government has implemented measures like import restrictions, relaxing rules for foreign investment, and increasing access to loans for manufacturing firms.

Uploaded by

akanksha sharma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Why Indian rupee is sliding

-Akanksha Sharma
18DM016
Indian rupee is one of the worst performing assets in Asia-Pacific. The further analysis shows
that it could be a major concern about the rising current account deficit. Current account deficit
remains under pressure which further impacts rupee. The CAD is expected to further widen the
gap to 2.8% of GDP for the financial year 2018, up from 1.9% of the previous financial year.
The journey since 1947
When India accomplished independence in 1947, it had no outside borrowings on the balance
sheet and thus the value of rupee was at par with that of US dollar. To finance welfare and
development activities, especially with the introduction of the Five Year Plan in 1951, the
government started external borrowings. This led to the devaluation of rupee. Since then
devaluation of rupee has impacted the Indian economy sharply.
In 1991, India faced a serious balance of payment crisis and was forced to sharply devaluate its
currency. The country was caught in between the grip of high inflation, low growth and the
problems of shortages of foreign reserves. Against these the rupee was devaluated to 17.90
against a dollar.
1993, was a very crucial year, as the currency was let free to flow with the market conditions.
The exchange rate was thus freed to be determined by the market with a few provisions of
intervention by the central bank under the situation of extreme irregularities.
This year the currency has devalued to 73.69 for every dollar.
Key reasons for Indian Rupee Depreciation against USD are:

1. The rise in the price of crude oil


The rise in the price of a crude barrel has impacted the rupee as crude price rose from 63$ per
barrel in February 2018 to 85$ in the current year has impacted the rupee. The United States
has told all countries including India, to limit oil imports from Iran. Iran is one of the major
exporters of crude oil to India after Saudi Arabia and Iraq. India imports over 80% of its oil, is
pulled in to Iran's unpleasant for the most part in light of geographic proximity that can get a
good deal on conveyance costs, and moreover the positive budgetary terms offered by Iran,
including the longest credit time span among the dominant part of India's suppliers.
2. FPI outflow
FPIs (Foreign Portfolio Investors) have emerged as net sellers in the first two months of FY19
and have already sold-off around Rs 14,000 crore worth of equity and debt securities in this
month so far. So far foreign investors have pulled out over Rs 14,500 crore from Indian capital
market this month. Adding pressure to Indian Rupee is strong month-end dollar demand from
importers and banks.
3. Fiscal Deficit blues
On the back of ballooning crude oil prices, crude oil imports from Iran and renewed trade war
tensions, experts are believing that these all may hurt India’s fiscal deficit over the upcoming
quarters as India is a net importer of crude oil and also heavily dependent on it. “Weakness in
Indian Rupee is expected to persist as it will be difficult to fund the widening current account
deficit given the increased return in form of higher US Dollar rates offered by other emerging
market debtors”
4. A trade war between the US and China
Both of these nations has triggered a trade war by imposing an import tariff on goods from
either of these countries which is not adoptable for the counties like India. US has imposed high
duties on Chinese product and the same done by china for US product. A trade war is leading
the market into risk off where price is moving down due to this US Dollar and yen are getting
strong.

The Indian currency, over the last 8-9 years has depreciated on an average of 4-5% every year.
The graph attached below shows devaluation trends of rupee from January 2017 to October
2018.The rupee in January 2017 was at Rs 67.47 for every dollar and rose to Rs 74.9 against a
dollar which shows inclination towards a weaker rupee than ever before.
The 2018 rupee slide has brought India-related macro concerns to the fore again. Since 2013,
the rupee had been quiet stable as a result of which macro-related risk premium on India had
reduced.
Impact:

A weak rupee makes the import of goods and services costly and in the end these extra costs
are carried to the end consumers who ultimately pay more for the same services received.
Importers will be hit because of the rupee’s decline as the cost of getting goods or equipment
to India will increase. Importers especially the oil ones and other oil intensive companies will
have to pay more Indian rupees to buy an equivalent amount of dollars.
While exporters may benefit from a weak rupee as they get more rupees while converting their
dollar export earnings to Indian currency.
MEASURES TO COTROL
The government recently initiated five steps to curb the falling rupee and trim the widening
CAD which in turn results in the sliding down of the rupee against a dollar.
The measures as suggested by finance minister Aruj Jaitly in September 2018 are as follows:

1) Import curb on non-essential items, specific items to be announced later

2) Review removal of exposure limit of 20 per cent of Foreign Portfolio Investors’ (FPI)
corporate bond portfolio to a single corporate group and 50 per cent of any issue of corporate
bond

3) No withholding tax on Masala Bonds issued during current fiscal. There will be removal of
restrictions on Indian Banks including restrictions on underwriting of Masala Bonds

4) Manufacturing firms will be able to avail loans up to $ 50 million with a maturity period of
one year

5) Review of mandatory hedging condition for infrastructure loans as already touched 86.5 per
cent of the full year's target of Rs 6.24 lakh crore. On August 31, the Controller General of
Accounts (CGA) said the fiscal deficit for April-July was Rs 5.40 lakh crore.
The Government has high hopes that these measures will have a positive impact of up to $10
billion and bring about some constancy in the sliding rupee and help to bring it back to normal
against every dollar.
The rupee, as of now has been the worst performing currency in the Asia this year. It has
weakened by about 12% since January.

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