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Looming threat of a precipitous decline

Looming threat of a precipitous decline
Highlights

The rupee value touched a low of 68.17 to a US dollar – its weakest level since early September 2013 – during the intra-day trade on Wednesday. The rupee weakness is a result of the massive foreign funds outflow from the Indian equity and debt markets. 

The rupee value touched a low of 68.17 to a US dollar – its weakest level since early September 2013 – during the intra-day trade on Wednesday. The rupee weakness is a result of the massive foreign funds outflow from the Indian equity and debt markets.

Besides, continuous decline in crude oil prices to new 12-year low impacted global investors' sentiments having a negative impact on capital flows into India. The collapse of Chinese economy has also contributed to capital flight from India. The reports of recovery in US economy and the resultant rate hike by US Federal Reserve have also led to capital exit. There are indications of one more rate hike.

Besides, macroeconomic weaknesses in Indian economy are also causing slump in the value of rupee.
There seems to be a secular decline in the value of rupee. The fall in the value of Indian currency is evident from the fact that the rupee value fell from a level of Rs 58.4 to the dollar in May 2014 to a low of Rs 68.17 on January 20, 2016.

This indicates a long-term decline, giving credence to the speculation of a possible precipitous decline of the value of rupee relative to the American dollar. In fact, the movement of rupee is not so as compared to other global currencies. For instance, the rupee registered a marginal appreciation relative to British pound, significant appreciation as compared to the Euro and a mixed picture relative to the Yen. But, this does not provide any reasonable solace to Indian economy as international trade is largely carried out in US dollars.

Though the depreciation of rupee has many negative implications, export sector should have been the main beneficiary as Indian exports would become cheaper in international market. But, this seems to be not happening. The exports have been falling.

The value of other global currencies declined more sharply than Indian rupee depriving us of the competitive advantage. The continuing recessionary trends in the global economy and the deep decline in Chinese economy (China is a major consumer in the world) have all contributed to slackening of global demand, impairing Indian export sector.

The foreign remittances are also adversely hit due to contraction in oil-producing and exporting countries due to an unprecedented fall in global oil prices. These countries have a large presence of Indian workers. The continuing macroeconomic weaknesses in our economy deter the affluent non-resident Indians from sending dollars back home.

The precipitous fall in the value of rupee would turn precarious for our economy as the country cannot expect the luxury of low oil prices furthermore. The structure of international economy provides a natural advantage to the American dollar. There is generally an inverse relationship between oil prices and the strength of the dollar.

Therefore, India cannot remain complacent of its balance of payments position. The relatively larger share of short-term debt commitments can prove to be much more troublesome. India needs a sound economic, fiscal and monetary policy regime to counter these alarming trends in the currency market.

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