Responding to Weakening Rupee

What is the issue?

Why is it not a concern?

India's external accounts look far more secure.
This is primarily because the foreign exchange reserves are in the comfort zone.
They had dipped below $300 billion in 2012-13, but in 2017-18 they were $424 billion.
The current account deficit, too, remains manageable.
It is true that the long low in commodity prices is over.
E.g. Fuel prices are in a rising trend.

What are the proposed risks?

The prospect of a trade war is seen as disruptive.
The merchandise trade deficit has been adequately compensated for.
This is in part by payments for services and remittances as well as strong capital inflows.
However, there has been concern expressed about all those components as well.
E.g. threat of visa restrictions by the US administration could affect IT services revenue.
But the revenue from IT and ITeS has been range-bound around $70 billion.
Also, rising crude oil prices mean that remittances from the Gulf have rebounded as well.
These fundamentals of the macro-economy appear to be strong, ruling out the risks.

What should India be prepared for?

Certainly, there will be increased inflationary risks.
The monetary policy committee of the RBI thus may be more willing to raise interest rates.
This might in turn hamper the nascent growth recovery.
In the short run, the trade deficit will also find it difficult to respond to a depreciating rupee.
Despite this, much of India imports, including fuel and electronics, will not be easy to substitute.

What lies ahead for India?

Indian rupee's depreciation is similar to what is happening with many emerging market currencies.
However, the consequences of rupee depreciation need a careful handling.
This is because, rupee depreciation is an opportunity that must not be wasted.
India must increase self-reliance, one way, by further indigenising India's fuel mix.
The government's large-scale renewable energy push should be seen as part of this effort.
A sustainable external account would require sustained increases in the competitiveness of Indian exports.
This requires domestic structural reform, which is also crucial for genuine macroeconomic stability.

Source: Business Standard