Rupee Crisis

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Rupee Crisis:

  • The rupee slid to a 19-month low against the dollar.
  • Indian rupee for first time in history plunged to record low of Rs. 70.07 against US dollar on 14 August 2018
  • Rupee has been on downslide in 2018 and has slipped 9% in 2018.

 

Factors responsible

  • The rupee’s depreciation is in line with other emerging market currencies as the dollar index has strengthened in the wake of the U.S. Federal Reserve raising interest rates.
  • Elevated oil prices are also weighing on rupee as India’s dependence on oil imports is very high.
  • Other factors that are impacting Indian currency are the political uncertainty in the wake of upcoming State elections and the general elections of 2019.
  • Concerns over earnings outlook has led to FPI [foreign portfolio investor] withdrawing from Indian market.
  • Concerns about inflation and the fiscal deficit also impacted bond prices.
  • Equities too fell due to losses in energy, PSU bank, media, infrastructure, realty and metal stocks amid signs of an escalating trade war between the U.S. and other world economies.
  • Turkey’s currency crisis has triggered for fresh selling across emerging markets and further down sliding rupee sharply.

 

Turkey angle:

  • Turkish lira has been in free fall following political and economic problems in Turkey, combined with fresh trouble on the external front.
  • It has slid by almost 50% against dollar in past one year.
  • The primary reason for ongoing rout in lira is poor economic management by government of President Recep Tayyip Erdogan.
  • Turkish economy is overheating due to soaring inflation (has reached annual rate of nearly 16% in July 2018), mounting levels of foreign debt and very high current account deficit (CAD).
  • Moreover, both Turkish government and central bank are facing serious loss of credibility.
  • There are also signs of massive bubble in construction sector of Turkey, which is further threatening country’s already fragile banking system.

 

Implications of rupee’s fall

  • On Imports: 
    • Weak rupee can act as kind of import tax.
    • Due to fall in rupee, importers (especially oil companies and other import-intensive companies) will be hardest hit as cost of importing goods or capital goods in to India will increase.
    • They will have to pay more Indian rupees to buy an equivalent amount of dollars.
  • On Exports: 
    • Exporters benefits from weak rupee as they get more rupees while converting their dollar export earnings into Indian currency.
    • India’s software exporters will benefit from rupee’s decline.
  • On Overall Economy:  
    • RBI assess trend in rupee vis-à-vis emerging market currency pack and if all emerging market currencies are depreciating, it may further allow rupee to weaken to protect export competitiveness.
    • However it will make imports costlier. It will increase oil prices (India is world’s third biggest oil importer and ships in about 80% of its crude oil requirements) which may exert further exert pressure on CAD and cause inflationary pressure.
    • It may force RBI to hike interest rates to check inflationary pressures.
    • It will also play important role in attracting long term foreign direct investment (FDI) to support make in India agenda, which has not yet taken off and one of the reason being the strong rupee value.
  • Inflation: More expensive imports are likely to drive inflation upward
  • Oil Price: It impacts the oil import bill since it costs more rupees per barrel of oil, which plays its own part in pushing inflation up
  • GDP: Costlier inputs and the subsequent increase in the prices of finished goods should have a positive impact on GDP. But the consequent decrease in demand due to higher prices could nullify this.
  • Tourism: Tourism could grow as more tourists visit India since their currency now buys more here. 

 

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