Relevance: GS Paper III (Economy)
Why has this issue cropped up?
The rupee is currently the worst-performing currency in Asia. It has lost about 12% of its value since the beginning of the year.
Some reasons for decline of rupee
- India has been unable to boost exports over the years for various reasons.
- At the same time, it has been unsuccessful in finding sustainable domestic sources of energy to address the over-reliance on oil imports. This has meant that the rise in the price of oil has traditionally exerted tremendous stress on the current account deficit and the currency, as is happening now.
- The depreciating rupee is also a symptom of persistently higher domestic inflation in India over many decades.
Steps taken to check decline of rupee
- The rupee is finally receiving some help from the authorities. The government has announced a list of measures to arrest the sharp decline in the currency.
- These include steps to curb the import of non-essential goods and encourage the export of domestic goods, which will help in addressing the country’s burgeoning current account deficit that hit a five-year high in July.
- Other steps such as removing restrictions on foreign portfolio investments and encouraging Indian borrowers to issue rupee-denominated ‘masala bonds’ were also announced to facilitate the inflow of dollars and de-risk the economy from fluctuations in the exchange rate.
- Further, the term limit imposed on borrowings of manufacturing companies is to be shortened further in order to curb dollar demand.
Way forward
- The response to the move from the markets will need to be carefully tracked.
- These steps to strengthen the rupee in the short term are welcome. However, they should not deflect attention from the more fundamental reasons behind the decline of the rupee.
- The government needs to think of a long-term plan to boost exports, preferably through steps that remove policy barriers that are impeding the growth of export-oriented sectors, in order to find a sustainable solution to the problem of the weakening rupee.
- The inflation problem cannot be addressed without drastic changes in the style of monetary policy conducted by the RBI, which is an unlikely proposition. Until then, the best that can be hoped for is a steady drop in the value of the rupee without any drastic shocks to the economy.
