SYLLABUS SECTION: GS III (ECONOMY)
WHY IN THE NEWS?
Recently, the rupee falls below the psychological level of 80 to 80.05 against the US dollar intra-day amid tightening monetary conditions and risk-off sentiments as well as persistent outflows from domestic markets.
REASONS FOR THE STEEP DESCENT SEEN IN THE INDIAN CURRENCY:
- Russia-Ukraine conflict
- soaring crude oil prices
- tightening of global financial conditions
What is the rupee exchange rate?
- The rupee’s exchange rate vis-à-vis the dollar is essentially the number of rupees one needs to buy $1.
- This is an important metric to buy not just US goods but also other goods and services (say crude oil) trade in which happens in US dollars.
Why are the rupee-dollar exchange rate and forex reserves falling?
- Surplus BoP :
- Case 1: If no action is being taken, it would lead to the rupee appreciating against the dollar.
- Case 2: The RBI swoops in and removes all the surplus dollars from the market and uses them to increase its forex reserves.
- The RBI keeps monitoring the BoP every week and keeps intervening in such a manner which ensures that the rupee’s exchange rate does not fluctuate too much.
Effect on the economy
- India’s imports are dollar-denominated, these imports will get costlier of Rupee falls below 80 against dollar.
- Costlier imports, in turn, will widen the trade deficit as well as the current account deficit which, in turn, will put pressure on the exchange rate.
- Under normal circumstances, rupee depreciation is good for the current account deficit because it leads to higher exports.
- But at present, India is already facing high inflation and continued depreciation may be making matters worse.
- A weakening rupee hurts foreign investors, who came looking for a good return, as well as Indians, who have loans abroad.
Read more: UPSC CURRENT AFFAIRS
SOURCE: INDIAN EXPRESS