Rupee Depreciation: Cause and Impact
It’s now a well-known fact that that the Indian currency has fallen significantly in the last few months more than ever in the history. What triggered the current fall in USD/INR and what are the impacts resulting from the fall?
The Cause
US Government’s decision around increasing the trade tariffs for countries like China that make up for significant volume in its imports has to do a lot with INR/USD fall. That along with volatility in Oil prices and the fall of Lira, the Turkish currency due to it’s increasing foreign debt has sent a scare among Foreign Investors who’ve sold off Rs. 1,100 Crores worth of stocks in August 2018 alone. The volatility in Oil prices + the fact that India is heavily dependant on oil imports to fulfill the demands make our trade deficit grow further as demand for USD goes up as well.
The Government hasn’t hit the panic mode yet stating that the currency is still under control and performing as per expectations under the current circumstances.
The Impact
Exporters benefit from the Rupee depreciation in the short term for sure — but it’s no longer an incentive enough to boost exports in terms of sheer volumes. The trade deficit has only been widening and has no signs of slowing — with slow growth in non-oil exports to blame. Compared to $210 billion in 2010–11, non-oil exports in 2017–18 were at $265 billion which comes down to a mere 3% growth annually. On the other hand — imports for non-essentials are going up by double digits every year owing to increasing consumption. Which in big picture lends sense and reason for the trade deficit situation. This isn’t a small problem and depreciating currency only intensifies it.
As mentioned earlier — Imports are growing at a rapid pace, apart from essentials like oil and gold, electronics make up for significant volume in non — essentials as India hasn’t caught up with China’s semiconductor manufacturing prowess. Make In India program has prompted device makers to set up assembly plants in the country, but a majority of the components are still being imported, so it doesn’t entirely cut down the import bill. Also, the prospect of exporting Indian-assembled devices isn’t as lucrative as there isn’t much of a cost advantage, both labor, and components costing lesser in China and it eliminates scope for additional exports revenue. As a countermeasure, the government has laid plans to curb imports for electronics to arrest the depreciation, by increasing duties and taxes on the same in the short term and Electronics are speculated to get more expensive in coming weeks.
All’s not bad: Rupee has depreciated against USD over last few years and it hasn’t really made any significant impact to the economy. The fiscal deficit is consistently dropping and Fitch recently announced a projected 7.8% growth in GDP for FY 19. About the rising fuel bills — The government won’t really consider cutting down taxes as it makes up for a major chunk of revenues, so one can only hope for international crude prices to come down. There’s still a chance they might not and there will be a cascading effect on prices of goods associated with it. That hasn’t happened yet — So, we’re still okay(mostly).
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