Falling rupee becoming a cause for concern

    21-May-2022
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Satyavan 'Saurabh'
Contd from previous issue
Cost-push inflation also known as wage-push inflation; Occurs when there is an increase (inflation) in aggregate prices due to an increase in wages and raw material costs. Companies may not be allowed to pass the high-cost burden entirely on to consumers, which, in turn, affects Government dividend earnings, raising questions about the budgeted fiscal deficit.
A strong US currency, as well as pessimistic global market sentiment, is causing the rupee to depreciate. Market sentiment has also been hurt as investors are worried about rising inflation, tightening of monetary policy in major countries of the world, economic slowdown, and rising geopolitical tensions. Additionally, the broad trade bill, as the country imports 85% of its oil needs, has spooked investors. Market participants fear that rising crude oil prices will hurt India's trade and current account.
Rupee depreciation is a double-edged sword for RBI. A weaker rupee should in theory boost India's exports, but in an environment of uncertainty and weak global demand, a fall in the external value of the rupee may not translate into higher exports. Inflation poses the risk of imported inflation and can make it difficult for the central bank to keep interest rates at record levels for long periods. India meets more than two-thirds of its domestic oil requirements through imports. India is one of the top importers of edible oils. A weak currency will further push up the prices of imported edible oil and lead to higher food inflation.
Curbing imports of non-essential items to counter depreciation would reduce the demand for dollars and boosting exports would help in increasing the flow of dollars into the country, thus helping in controlling the depreciation of the rupee. Masala Bonds are directly linked to the Indian currency. If Indian borrowers issue more rupee masala bonds, this will increase liquidity in the market or increase the rupee stock against certain currencies in the market and this will help support the rupee.
External commercial borrowing (ECB) is a type of loan in foreign currency, made by non-resident lenders. Thus, easing of ECB conditions helps in getting more loans in foreign currencies, which will increase the inflow of foreign currency, which will lead to an appreciation of the rupee. The Reserve Bank of India is intervening to soften the currency's slide - the fall in its forex reserves suggests it is a serious matter. It reduces the volatility of the currency.
Given that the rupee is overvalued, the central bank should allow the currency to slip, allowing it to find its level, only to intervene to reduce additional volatility. Currency depreciation will act as an automatic stabilizer. This will help ease the current account pressure by curbing imports, but more importantly, it will help boost exports, an important driver of the country's economy at present.
The writer is Research Scholar, Poet, Independent Journalist, and Columnist, All India Radio and TV Panelist