Paper: GS – III, Subject: Indian Economy, Topic: Trade and External Sector, Issue: Rupee Depreciation.
Context:
The recent depreciation of the Indian Rupee, which has breached the psychologically critical 90-per-dollar level.
Key Takeaways:
Macroeconomic Paradox:
- Inflation has fallen below 1%, GDP grew 8.2% in Q2, and crude oil prices are soft normally supportive for the rupee.
- The currency is weakening due to structural external pressures overpowering positive domestic indicators.
RBI’s Role and Intervention Strategy:
- Gradual Depreciation Approach: The RBI appears to be favoring a gradual depreciation of the Rupee to keep exports competitive.
- Limited Intervention: The RBI has not actively intervened to provide strength to the Rupee, possibly to conserve its reserves.
- Maintaining Competitive Levels: The authorities are likely to keep the Rupee at competitive levels, as signaled by the correction in the real effective exchange rate.
- Soft-Touch Intervention: The RBI is choosing a more measured, “soft-touch” approach to intervention, conserving its firepower for when volatility threatens to become disorderly.
Impact on the Indian Economy:
- Marginal Benefit to Exporters: A softer Rupee offers some marginal benefit to exporters by making their goods more competitive in the global market.
- Hurts Importers: A weaker Rupee makes imports more expensive, increasing costs for businesses and consumers.
- Risk of Imported Inflation: A depreciating Rupee raises the risk of imported inflation, as the cost of imported goods and services increases.
Macroeconomic Paradox Inflation has fallen below 1%, GDP grew 8.2% in Q2, and crude oil prices are soft normally supportive for the rupee. Yet, the currency is weakening due to structural external pressures overpowering positive domestic indicators.
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