RUPEE DEPRECIATION

The Reserve Bank of India (RBI) has announced its first repo rate cut in five years.  The rate has been reduced by 25 basis points from 6.50% to 6.25%.  The move aims to stimulate economic growth, while also balancing inflation control.

Repo rate:

Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.

Impact of Repo Rate Cut

  • Encourages Borrowing & Investment: Lower interest rates make loans cheaper, boosting business investment and consumer spending.
  • Supports Economic Expansion: Growth in automobile, real estate, and consumer goods
  • Potential Inflationary Pressure: A weaker rupee increases the cost of imported goods, impacting fuel, raw materials, and essential commodities.

Rupee Depreciation and Global Currency Market Trends

Current Status of the Rupee

  • The Indian rupee recently hit an all-time low of 87.4650 per USD, marking a 2% decline in 2024.
  • The US dollar has strengthened due to global interest rate differentials and capital flows.

Reasons for Rupee Depreciation

  • Higher US Interest Rates:
    • The US Federal Reserve maintains high interest rates (4.25% – 4.50%) to curb inflation.
    • Investors prefer US assets due to economic stability and better returns.
  • High Demand for US Dollars:
    • International trade, including oil and technology imports, is invoiced in USD.
    • This keeps demand for the dollar high, further strengthening it.
  • India’s Current Account Deficit (CAD):
    • CAD widened to USD 11.2 billion (1.2% of GDP) (July–September 2024).
    • Merchandise trade deficit: USD 137.44 billion (April–September 2024).
    • India-China trade deficit: USD 85.1 billion in FY 2024.
  • Market Speculation and Hedging:
    • Importers are covering currency exposure, while exporters delay hedging to benefit from a weaker rupee.

Rupee Depreciation:

Negative Impacts

  • Higher Inflation: Costlier imports, especially fuel and capital goods.
  • Foreign Debt Burden: Weak rupee makes external debt repayment expensive.
  • Investor Confidence: Uncertainty may reduce foreign investments.

Potential Benefits

  • Boosts Exports: A weaker rupee makes Indian goods cheaper in global markets.
  • Encourages Foreign Direct Investment (FDI): Competitive pricing attracts global businesses.

Government and RBI’s Measures to Stabilize the Rupee

Forex Market Interventions

  • RBI selling dollars to curb excessive volatility.
  • Impact: Drains forex reserves and reduces domestic liquidity, which may slow economic growth.

Open Market Operations (OMO)

  • RBI buys/sells government securities to manage liquidity and interest rates.
  • Helps balance economic expansion and financial stability.

Non-Deliverable Forwards (NDF) Market Participation

  • RBI intervenes in offshore currency markets to control speculative pressures.

Way Forward

  • Long-Term Currency Stability: Structural reforms to reduce trade deficit and attract FDI.
  • Strengthening Exports: Focus on quality, technology, and innovation like Germany, Japan, and South Korea.
  • Sustainable Growth Model: Investment in R&D, automation, and skill development to enhance competitiveness.

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