The depreciation
of rupee has mostly affected the students like me. Pocket money has not changed
over decades on the contrary petrol prices are expanding like petals of young
flower.
Dollar again
jumps up to all-time high. 1 U.S. dollar is 56.7988186 Indian rupees, according
to Google, today. The Indian Rupee (INR) is in a downward spiral of sorts. It
has depreciated against all major currencies. The oil ministry has raised the
petrol prices by 7 rupees per liter due to downward trending of rupee. RBI
always tried to protect rupee by selling off dollars but still has been unable
to hold rupee from falling at a rapid pace. The last resort of controlling
rupee fall is issuing bonds by Reserve Bank of India. To prevent further
downfall of Indian rupee, RBI is considering selling dollars directly to oil
marketing firms.
It is a known fact that the price of any asset is a function of its demand and
supply. And considering that the growth in Indian economy has slowed down
global investors shunned Indian equities. This has put a downward pressure on
rupee. Widening current account deficit is another reason.
A current account deficit results when imports are more than exports. Now it
must be noted that India's imports majorly constitute of crude and gold which
is bought and sold in dollars. Thus, increasing imports increase the demand for
dollars. And this increases the supply of rupee as people sell rupee to buy
dollars. This puts a downward pressure on rupee.
Deficit refinancing is another area of concern. Containing fiscal deficit by money printing increases
the money supply in the economy. This stokes inflation and impacts the rupee.
So, what steps have to be taken to curb a further downfall in INR? A partial
intervention by Reserve Bank of India (RBI) is a quick fix solution. Creating
an investment friendly climate is another option. Right now, bureaucratic
impediments in India have hurt the investment sentiment of overseas investors.
Reducing red tape can attract significant amount of money via FII (Foreign
Institutional Investment) and FDI (Foreign Direct Investment) route in India.
This should help rupee gain some strength.
Curbing fiscal and current deficit can also go a long way in supporting rupee.
Phasing out of subsidies in a gradual manner should reduce fiscal deficit. This
eliminates the need of deficit financing and thereby excess money supply in the
economy. In terms of containing current account deficit government will have to
take steps to make exports competitive. Providing tax sops to exporters and
access to cheap credit are a few ways by which this can be done.
- sunny
(courtesy: Google)
