A lot of currencies lately have depreciated with respect to dollar, and fall of rupee against dollar has posed the same challenge the rupee appreciation caused in 2007. But, the impact has reversed this time with exporters gaining prized revenues whereas the importers are facing the music. The improved demand for dollar against the rupee has paved way for a sharp depreciation with rupee crashing from August 2011 levels, and reaching an all time low of 65.56/USD currently, due to 3 factors.
Firstly, the bleak global economic scenario primarily attributed to the European debt crisis. This has led to greater demand for dollars against the supply for rupee. Secondly, the slide in rupee attributed greatly to the speculation existing in the markets. Finally, there have been exits from the Indian market by Foreign Institutional Investors with FII’s continuously withdrawing their investments, thus leading to a heightened demand for dollars, further leading to falling rupee.
Impact of falling rupee on the Indian economy –
The first big impact of the falling rupee may be observed from the rising import bill since India imports nearly three-fourth of its fuel demand. This indicates companies importing oil needs to dish out more against the same dollar bills. It has strongly impacted the bottom line of these firms as well as the subsidy bill of the government. Large buying of dollars from the Indian market to meet the import bill has made matters worse.
Impact of falling rupee on public budget –
Rising inflation has been hitting the common man for some time now and with weakening of the rupee it has made medicines, crude oil and fertilizers which India imports in bulk, costlier.
Students availing loans for studies abroad is facing severe challenge with education loan being taken in rupee whereas it’s being paid to institutes in dollar.
The declining rupee has hit the automobile sector as well with rise in input cost of imported parts.
Consumer goods like mobiles, TVs having imported components have become costlier.
Why Government failed to arrest falling rupee:
The government has initiated certain steps to arrest the free fall of rupee in the last couple of weeks but has failed to check the downfall with rupee reaching new low of 64 versus the dollar.
Recent intervention from Reserve Bank with announcement of measures like triggering talks of return of capital control regime, imposing restriction on Indian firms investing abroad didn’t work.
Role played by RBI:
RBI has been quite watchful in its involvement during the entire rupee depreciation episode. It has however come up with timely interventions by selling dollars occasionally to arrest sharp fall in currency.
Looking at the current scenario, the currency crises looks set to stay for a longer period.
Remedies:
Currency strategists feel the need of the hour is to unveil measures by government and RBI. They advice, success of an economy lies in the capability of the government to implement its policies in an effective manner.
