Stopping the rupee’s free fall(Hindu summary-5th July 2018)

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

The Hindu

Context:

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 $:

  1. Less availability of $ due to tight US Federal reserve monetary policy
  2. Less circulation of $ in American market led to shortage of credit availability
  3. Borrowers for investments started adjusting $$ by withdrawing their investments in other countries like India.
  4. Indian fuel imports need to pay high price due to increased demand of fuel and increased dollars price(Remember all our imports are paid in $$$ usually due to its convertibility)
  5. 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:

  1. Cheap exports
  2. Increased sale of exports due to cheap price
  3. Increases export revenue
  4. Increases domestic manufacturing and production

Disadvantages of $ Appreciation: 

  1. Increased import prices
  2. Withdrawal of Foreign investments
  3. Impact on share market affecting domestic share holders

Note

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
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