PROBLEMS CREATING PRESSURE ON THE INDIAN RUPEE

This week, the Indian rupee fell to an all-time low against the dollar, falling below the 79 rupees to a dollar threshold and reaching a low of 79.05 on Wednesday. Many analysts predict that the rupee will continue to lose value over the upcoming months and pass the 80 rupees to the dollar threshold. The International Monetary Fund (IMF) anticipates that by FY29, the rupee will lose value past the threshold of 94 rupees to a dollar. But the common man has no idea how this will work so what is meant by a fall in the rupee? The value of the Indian rupee about the US dollar is determined by supply and demand. The value of the Indian rupee decreases when the demand for US dollars increases and vice versa. The demand for the dollar will be larger than the supply if a nation imports more than it exports, which will cause the indigenous currency, such as the rupee in India, to lose value about the dollar. And there are some structural problems which continuously keep pressure on the rupee.

Structural problems pressurising rupee

1)TRADE DEFICIT IS INCREASING 

India has increased exports but not in line with an increase in imports so as a result the current account deficit is increased by 2% How does a current account deficit impact Indian Rupee? In simple words, an increasing current account deficit (of India) leads to an increase in the demand for Dollar. Why? Because we need more Dollars than before to finance our growing deficit, and also pay for the imports. An increase in the demand for a currency leads to its appreciation. And if the US Dollar is appreciating against Indian Rupee, it means our domestic currency is depreciating.

2) Dependency on oil import

Oil imports have increased 94% due to the war between Russia and Ukraine India is the third largest crude oil importing country in the world, coming only after US and China. India imports more than 80% of its crude oil requirements, thereby making it more vulnerable to changes in the international oil market. For example, if the crude oil prices increase, our total import cost will also increase, affecting our current account balance which in turn affects the currency market.

3)OUTFLOW OF FOREIGN CURRENCY 

Due to the increase in the interest rate by US federal bank the liquidity of the dollar overall over the globe will reduce as usually the foreign currency, especially the dollar which is in the form of foreign portfolio investment & Foreign direct investment which directly contribute to the scarcity of the dollar in the Indian market.

4)Foreign debt 

India has $267 billion in foreign debt (Govt & Cooperate) this short debt makes the Indian rupee more prone to depreciative pressure 

5)Gold Imports 

Gold has been a haven for savings in the time of global economic crisis so at present, there is an increase in demand for gold in the domestic market that will pressurise Indian currency by evaporating more rupees to buy the gold  

6)The Global scenario 

There is a war ongoing between Russia and Ukraine has impacted many ways world, especially 1% of global GDP declined by Russia and Ukraine war not only this there are economic sanctions made by western countries this also affected the Indian rupee 

But how has RBI & GOVERNMENT has tackled this pressure 

At present, RBI & GOVERNMENT has two problems to control the depreciation n of the rupee & tackle inflation at first, The Reserve Bank of India (RBI) is waging a multifaceted battle to halt the rupee's slide to new lows. According to reports, the central bank sold dollars on Wednesday for between 78.97 and 78.98 per US dollar and significantly increased its foreign exchange reserves to protect the rupee from a rapid devaluation, as cited by Outlook. The total foreign exchange reserves have decreased by $40.94 billion since February 25.

1)RBI ALLOWS FOREIGN TRADE IN RUPEE

India’s widening trade gap has also caused the rupee to lately slide to lifetime lows against the US dollar, exacerbating the threat of imported inflation in a country that relies on overseas shipments for meeting nearly four-fifths of its annual motor-fuel demand. A greater global trade share for the rupee will help the central bank preserve its foreign exchange stockpile 

The international trade settlement in rupees will provide a solution to such transactions with countries like Russia that are out of the SWIFT system

This will promote trade, especially imports, for India. The critical part will, however, be the determination of the exchange rate that will be decided by the market."

For settlement of trade transactions with any country, banks in India may open Special Rupee Vostro Accounts of correspondent banks of the partner trading country.

2)RBI NUDGES GOVERNMENT TO AS BRICS BANK TO ISSUE RUPEE BANKS 

The Reserve Bank of India has recommended that the government approach the Brics Bank, now known as the New Development Bank (NDB), to sell rupee-denominated bonds in overseas markets. Because NEW DEVELOPMENT BANK has a credit rating of AAA which makes the market more secure 

3) RBI EASE FPI & NPI INTEREST NORMS 

RBI to shore up the forex reserves and stabilise rupee value has taken certain measures Doubled the overseas borrowing limit for corporates Removed the interest rate ceilings for NRI's foreign currency deposits Allowed the banks to temporarily raise foreign currency non-resident banks - FCNR (B) and non-resident external (NRE) deposits without reference to the current regulations on interest rates Incremental FCNR (B) and NRE deposits will be exempt from maintenance of CRR and SLR

4)CONTROLLING OIL & GOLD IMPORTS 

Oil and gold imports are raised by 94% and 169% respectively so the government of India has shifted its importing haven from central Asia to Russia which is providing oil at a discount rate of 35%

The government also increased import duty on gold to tackle domestic demand by increasing the gold price 

5)GOVERNMENT CONTROLLING EXPORTS 

The government has restricted wheat and steel imports to meet domestic demand because if these products are not available to the domestic market this may lead to demand push inflation this effect forex reserves may protect India from inflation 

Depreciation of the rupee has many side effects like increase in price, trade war, and increase in oil prices so government and RBI have kept at most effective to control the depreciation of rupee and inflation at the same time so at present India has comfortable forex reserves which have huge import cover so there is no scenario at present India turns like Srilanka this are the factors behind the pressure on the Indian rupee.  

CH.J.V.K.S.Swaroop