Impact of sharp fall in Rupee on Indian Economy

Context:

Recently the Indian Rupee hit an all-time low of Rs. 85 against the US Dollar.

Reasons for fall in Rupee value

• Continuous outflow of foreign portfolio investment from securities markets
• Excessive stock valuation
• Discouragement of corporate performance
• Economic stimulus by China
• Change of power in the US
• Trump likely to adopt protectionist policies
• Lower domestic consumption and investment

Effects:

• Increase in trade and current account deficit
• Increase in import inflation
• Uncertain foreign investment flows

Efforts to arrest fall in Rupee value:

• Reserve Bank of India (RBI) is taking a proactive stance in the foreign exchange market to arrest the free fall of Rupee. This has been termed as an 'orderly' exchange operation by the RBI.
• Former RBI Governor, Shaktikanta Das has rejected the idea of ​​a BRICS currency and made it clear that India has no de-dollarisation agenda.
  • The government should also issue a clear statement to this effect in public forums and diplomatic talks to put the issue to rest as it may adversely impact India-US bilateral trade.
• RBI can use foreign exchange reserves to a certain extent to manage rupee volatility.
• The Finance Ministry has admitted that the recent fluctuations in the exchange rate impede the independence of monetary policymakers. In such a situation, policymakers should be prepared to deal with this new risk.