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Why Indian rupee is deprecating, measures to control it

For the last couple of months, Indian rupee has become the worst performing Asian currency against the dollar. Indian currency is performing worst among all the major emerging economies. In the first week of July 2013, it crossed the psychological barrier of Rs. 60 and reached to an all time high of Rs.61 to the dollar. The rupees, in recent times, have not only depreciated against dollar but against all the major currencies. Infact, the decline in the value of rupee has been sharper relative to British Pound and Euro. By the 2nd week of July 2013, 1 pound becomes equivalent to Rs.90.44 and 1 Euro equivalent to Rs.78.21.

Depreciation has led to the costlier imports and since India is an import intensive country, its current account deficit (CAD) and trade account deficit is increasing at an alarming rate. Depreciation has increased the burden on the already high external debt of the country and by the end of March 2013; it increased to US $ 390.0 billion. The fall in the value of rupees has adversely affected the pace of economic growth as it has added pressure on the high inflation rate prevailing in the country. Depreciation has directly impacted persons working in import-intensive industries and allied sectors, those wishing to travel abroad or planning higher studies abroad. In short, the rupee's decline has affected everyone in the economy.

Following are the major causes for this persistent decline in the value of rupee:-

  1. Strengthening of US dollar due to the decline in monetary policy of 'quantitative easing' by the US Federal.
  2. Significant rise in domestic demand for gold Imports as has led to depreciation of rupee due to increasing Current account deficit as India has to pay sell its Forex reserves for gold imports.
  3. Fiscal deficit in the Central budget is increasing at an alarming rate and at present it is at 4.5% of GDP. This deficit is financed by hot money flows and from FDIs.
  4. The recent downgrading of India by international rating agency has made India less attractive destination for foreign investors.
  5. Policy- paralysis prevailing in the country has adversely affected the sentiments foreign investors and this has led to flight of dollars from foreign institutional investments (FIIs).
  6. Due to economic crisis going in Europe as well as other parts of world, India's export has contracted significantly and which has resulted in adverse Balance of Payment conditions.
  7. High inflation rate in the economy for quite a long time has resulted in the fall of nominal value of rupee.

Looking at the current economic outlook, it is necessary for both government and RBI to step in and prevent the further depreciation of rupee. Following are the measures that should be taken by RBI and government:-

  1. Government should increase the limit of FDI in the existing sectors as well as encouraging in other sectors such as aviation, retail, telecommunication, radio & broadcasting etc.
  2. Government should create a stable political and economic environment in order to make India an attractive destination for foreign investments.
  3. Government should raise import duty on gold in order to decrease the domestic demand for gold import.
  4. Government and both RBI should take measures to bring down high inflation rates.
  5. Government should steps boost export-intensive sectors and develop import-substituting industries in order to make India less dependent on imports.
  6. RBI should sell Forex reserves and buy rupees in an immediate action in order to arrest the further decline in the value of rupees.
  7. RBI should hike the interest rates in order to reduce the money supply in the economy.

All said and done but it may be argued that if policy makers attempt to arrest the further depreciation of rupees, then the over-all economic growth will take a back seat. Hence, we can say that the policy makers are facing a real challenge of arresting the fall in the value of rupee as well as reviving the already slow economic growth. The future of the Indian economy now depends on how our policy makers deal with the current global economic situations.