Rupee Depreciation: Causes and Consequences
Recently, the Indian rupee fell by 22 paise more, making 72.38 rupees equal to 1 US dollar which is causing increasing concerns over bad global financial conditions and rising prices of crude oil which is linked with the domestic macroeconomic variables becoming worse. Analysts forecast a lower rupee value in upcoming months. The rupee is presumed to remain in the 68-72 span against the US dollar throughout the year among tightening of global liquidity, growing protectionist tendencies, high oil prices, and a strong dollar. Analysts also presumed that before the end of 2018, RBI will increase one more policy rate in the range of 25-50 basis points.
Other Currencies versus the US Dollar
People who think that the value of the rupee is falling because of demonetization & GST, let me tell you that there are other aspects responsible for that and it’s not just only India, who is losing the value of its currency, there are other countries too. Not just India, but other emerging market economies are also facing uncontrollable volatility of their currency. Other emerging market economies are also a victim of sharp exchange rate depreciation since the starting of this year. In specific, the Argentina peso and Turkish lira have decreased excessively since April 2018. But among all the Asian currencies, Indian rupee became the worst performing currency this year. India follows the controlled floating exchange rate system in which the market forces highly determines the exchange rate. The RBI does not target an already specified level of rupee exchange rate, but it periodically intercedes in the foreign exchange market to stem the high volatility.
Also Read: Reasons for Oil Price Hikes in India
A Rise in Crude oil Prices
An excessive rise in the prices of crude oil has been observed by the Indians this year. When the Brent crude oil jumped to $63 per barrel from a level of $70 per barrel within two weeks from 26 January- 9 February 2018, the crude oil prices saw a sharp depletion. But since the mid of February 2018, the prices of crude oil is mostly increasing with an effect of the Brent crude oil rising a level of $80 per barrel in May.
Increasing Import bills of Crude Oil
The president of United Nation has announced that all the country’s crude oil imports from Iran will be going to restrict by 4 November this year including India. A PTI report says that if any country tries to carry out any transaction with Tehran (capital of Iran), will face sanctions. Iran is one of the top exporters of crude oil of Indian after Iraq and Saudi Arabia. Due to geographic proximity that can help India to save on shipping costs as well as convenient financial terms offered by Iran, including the longest credit period out of all India’s suppliers, India is highly attracted and dependent on Iran for crude oil and imports over 80% of it from Iran.
The US and China’s Trade war
There are conflicts taking place between the US and China for more than three months because of the implication of import tariffs on goods by both the countries. Both the countries have made a trade war scenario which is harmful to other countries including India. This Trade war situation had risked the market of other countries, making the price of all the assets fall. Japanese Yen and US Dollar are appearing are deriving advantage from the trade war. As Indian rupee is already facing problems due to high prices of crude oil, the trade war scenario is sparking another phase of cash outflows.
In a phase of rising prices of crude oil, resumed tensions of the trade war and the imports of crude oil from Iran, analysts have forecast that these all reasons can result to the fiscal deficit over the coming months as India is a crude oil net importer and is highly dependent on it. The weakening of Indian Rupee is estimated to continue because of the funding of the current account deficit expansion due to rising returns in form of higher rate of US Dollar provided by other debtors of appearing market.
FPIs (Foreign Portfolio Investors) have appeared as total sellers in the first two months of 2019 and up to Rs 14,000 crore worth of equity and debt securities have sold out before only recently. Foreign investors have withdrawn about Rs 14,500 crore this month from Indian capital market, which added pressure to Indian currency.
Depreciation & Consequences of Rupee
Imports of goods and services will become more expensive because of a weak rupee. The end-customers will get increased cost of import by the firms. Higher oil prices in the phase of depreciating rupee is a downfall for the Indian economy. India is the third largest oil-consuming country in the world, after US and China. Currently, India imports up to 82% of its consumption of crude oil. For reducing oil import dependency, India is making efforts by raising exploration and production of domestic oil. As the demand for crude oil is increasing day by day, it has become the highest import bill for India.
The depreciation of rupee can also increase the tension of India Inc. due to their unhedged currency vulnerability. While the precise data on the restricted use against the risks of the rupee is not available by Indian corporates, a study by India Ratings found that with overseas borrowing, only 36% of the top 100 organizations are restricted for risks of Indian currency. Non-financial organizations from Indian (and other EMEs) supplied foreign currency debt (mostly in the US dollar) in international markets, taking benefit of the interest rate which was very low persuading in the advanced economies in the post-crisis period. During the post-crisis period, Indian corporate’s External Commercial Borrowings (ECBs) have crucially increased. Depreciation of rupee will influence the credit profiles and balance-sheets of such corporates straightly, which have supplied securities without properly restricting the currency risks. These types of organizations may find the service of foreign-currency debt difficult and may tolerate high losses caused by a rise in the burden of repayment.
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