www.iasinsights.in ; www.iasgyaan.com posts Hindu summary about Rising value of Dollar and decreased value of Rupee.
Stopping the rupee’s free fall
Increased demand of $—>Rising value of $—> India purchasing $ by paying more rupee i.e. depreciation of rupee
Facts to be known:
- Foreign portfolio investors pulled out ₹29,714 crore from India in May 2018, the highest outflow since November 2016.
- Outflows in the first half of 2018 stood at ₹47,836 crore, the highest in a decade.
- U.S. dollar against major currencies, has risen by about 6.5% since February leading to Dollar appreciation.
- Rupee has fallen about 7.5% since the beginning of the year, making it the worst-performing currency in Asia leading to Rupee depriciation
Reasons for Appreciation of $:
- Less availability of $ due to tight US Federal reserve monetary policy
- Less circulation of $ in American market led to shortage of credit availability
- Borrowers for investments started adjusting $$ by withdrawing their investments in other countries like India.
- Indian fuel imports need to pay high price due to increased demand of fuel and increased dollars price(Remember all our imports are paid in $$$ usually due to its convertibility)
- Increasing Fiscal deficit –> more printing of rupee by RBI—> increase in cheap money (Cheap money implies easy availability of Rupee)—> decreased demand of rupee–> Appreciation of $
Advantages of Rupee Depreciation:
- Cheap exports
- Increased sale of exports due to cheap price
- Increases export revenue
- Increases domestic manufacturing and production
Disadvantages of $ Appreciation:
- Increased import prices
- Withdrawal of Foreign investments
- Impact on share market affecting domestic share holders
As Indian economy is Imported driven economy $ appreciation or rupee depreciation is always risky.
What can be done?
- RBI tighten monetary policy making rupee hot money
- RBI to sell Forex reserves in open markets i.e pumping more $$ in the market , to adjust the $ and rupee exchange value
- Review the Liberal Remittance scheme to restrict Forex outflow