Impact Of Falling

Rupee
- By Ankit Agrawal
ankitmay28@gmail.com

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 INTRODUCTION

• The Indian rupee has crashed past the 72-mark against US

dollar and continues to be on a roller coaster ride.

• The sudden fall has caught the government and central

bank off-guard.

• In economic analysis no phenomenon has a singular

outcome in terms of effects.
• Exports

• Balance of trade

• Inflation

• Interest rate

• Companies with forex exposure

 EXPORTS

• Weaker rupee helps exports to grow.

• Depreciation leads to more EXPORTS.

• However, for it to work, there are 2 caveats-

• First, the elasticity of exports with respect to price must be
high.

• Meaning thereby that when prices fall, demand for Indian

exports increase.

• But most of the goods that India export have fairly inelastic
demand like chemicals, textiles, handicrafts, agri products,
etc.
• Second, the link between depreciation and exports to really
get established, rupee must weaken in a dominant manner.

• The rate of depreciation is still lower than that of the

currencies in Latin America, Africa, Turkey, China.

• It is only the East Asian economies that have withstood the

free fall of currencies vis-a-vis the dollar.
 BALANCE OF TRADE

• Our imports are always higher than exports.

• Thus the net impact on trade balance is always negative in

rupee terms.

• The import bill on oil increases sharply.

 INFLATION
• As a fallout of this phenomenon, the pressure on prices in
India would be higher.

• Take the example of crude oil- Whenever rupee weakens,

the oil prices in India goes up.

• This trickle down to other products such as machinery,

electronics, consumer products etc.
 INTEREST RATE

• As inflation rises, the Reserve Bank of India (RBI) will be

flagging inflation concerns.

• This will compel the RBI to increase the repo rate, so that
inflation remains b/w 2% - 6%

• That’s why RBI keep intervening in currency market.

(explained in my last video)
 COMPANIES WITH FOREX EXPOSURE

• Companies which have forex exposure will have to make

provision for higher costs or losses in the absence of hedged
positions.

• This may hamper the growth of businesses.

• Exports

• Balance of trade

• Inflation

• Interest rate

• Companies with forex exposure

 SO WHAT INDIA SHOULD DO?

• As economic survey mentioned, India must move towards

export driven economy.

• Import substitution should be given importance.

• Make in India must succeed to take the benefit of falling

rupee.
Impact Of Falling
Rupee
- By Ankit Agrawal