Causes and Problems due to falling rupee in India

India’s rupee value has fallen precipitously against the dollar. Among the BRICS nations after the Russian Ruble, the Indian rupee depreciated the most in this period. 

Causes of the Rupee depreciation :- 

Spike in oil prices has pulled down the rupee, by pushing up dollar demand. 

▪ Increase in the demand of crude oil will be followed by the increasing import bill in the form of payment of more dollars to oil exporting countries. Hence the demand of dollar will increase in the Indian market which will reduce the value of Indian rupee. 

Global Trade war fears triggered by the US and China’s retaliatory import tariffs have also weakened the Rupee. 

▪ So due to this war the price of the imported commodities will go up which will further increase the outflow of dollar from the Indian market. 

Increasing Trade Deficit of India: 

▪ Outflow of foreign currency is more from Indian market as compared to inflow of foreign currency. As per the law of demand; if the demand of a commodity increases, its price also follows it. In the same way; when more and more foreign currency i.e. dollar goes out of Indian market, its domestic price increases and the price of Indian rupee decreases.

Political uncertainty:

▪ Major point of uncertainty is that whether the current government will retain the power at centre or not. If the new government comes in the power and changes the FDI and other policies then the money of investors will trap. 

▪ So the foreign investors are pulling out their money from the Indian market to invest in those markets which can provide them secured return. This is the reason that the demand of dollar is increasing and the price of Indian rupee of falling. 

International currencies:

▪ Chinese yuan has fallen sharply in the last few sessions. This has triggered a dollar flight from many emerging economies like India. Spurt in dollar outflow has pulled down most Asian currencies, including the rupee. 

▪ Free fall of the Turkish lira following an economic crisis in that country impacted emerging economy currencies, which lost ground against the dollar. 

▪ Global factorsincluding rising interest ratesin the US. The US Federal Reserve’srate hikes have made dollar assets give more returns. ▪ FPI outflows. 

▪ The current account deficit and net capital outflows influence the shortage of dollar liquidity, which result in rupee depreciation. ▪ High import intensity in some key segments like petroleum and gems and jewellery. 

Problems due to falling rupee in India :- 

▪ A weak rupee makes overseas travel costlier. 

▪ Imported goods like computers, mobile phones and crude oil may get costlier. This may prompt oil companies to hike petrol and diesel prices too. 

▪ Costlier transport fuel will knock up prices of most goods and stoke inflation. Diesel price hikes increase the cost of transportation of goods being transported by road. Unfortunately, many food items fall in this category. 

▪ Elevated inflation may prompt RBI to raise lending rates. It may also keep interest rates high to maintain India’s attractiveness as a debt market and woo dollars. 

▪ High-interest rates may push up home loan EMIs. 

CAD:- 

▪ Even under a benign assumption of crude oil at around $70 per barrel, India’s current account deficit will reach a six-year high of 2.5% of India’s gross domestic product (GDP) in 2018-19. If crude oil prices touch $90 per barrel, this could push up the current account deficit to 3.6% of GDP. 

Exports:- 

▪ Also, not much respite is expected from the export channel. The recent depreciation in rupee is unlikely to boost exports in the short-run as there are other structural factors, which are weighing on India’s exports sector 

Banking sector:- 

▪ With more hikes in the offing by RBI , the already low credit growth figures could dip further. 

ECB:- 

▪ Slowing down of domestic credit flow had prompted many firmsto borrow abroad, and external commercial borrowings (ECBs) had emerged as an important source of alternative funding for Indian companies over the past few quarters. 

▪ But the rupee’s fall will make even that option more difficult, as it has raised external borrowing costs. 

▪ This will dampen corporate borrowing and weaken economic activity at a time when domestic banks are not in the best position to raise lending. 

▪ Many domestic companies that have taken dollar loans will also face significantly higher servicing costs. 

▪ It may hurt India’s fiscal deficit as India is a net importer of crude oil. . 

Tourism:- 

▪ The domestic tourism could grow as more tourists visit India since their currency now buys more here. 

▪ In the medium term, export-oriented industries may also create more jobs