25 Dec, 2019 Divesh Mishra

There is a talk of Rupee touching an alarming rate of 70 for a US Dollar. It has already breached the mark of Rs 69 for a dollar in end June. What are the reasons behind this depreciation in the value of the Indian currency against the strongest and the reserve currency of the world.

One reason is our ever widening Current Account Deficit (CAD). Means a greater outflow of dollars and a lower inflow. The prime reason behind the increasing outflow of dollars is the continuous increase in the price of crude. The crude is ruling over USD 73 per per barrel. India meets over 80% of its petrochemical requirements through imports.

Another reason is corporate borrowings. External Commercial Borrowings (ECB). These ECB repayments which are due for payment in USD also putting pressure on the value of Rupee vis a vis USD.

Third reason is reduction in foreign currency inflows in the stock markets.

The fourth reason being an on going trade war between US and China which has played a negative role in the world markets and many emerging economies are badly hurt. But the Indian currency has suffered the most, at least till yesterday. The world currency markets do not like uncertainties.

Finally, the increase in Repo Rate on the 6th June to 6.25% has also played its role in making dollar costlier.

The depreciation in the Rupee would lead to a) further depreciation in the value of Rupee and depletion in our Foreign Currency Reserves, b) increase in rate of local interest rate which would result in borrowings becoming costlier, c) decrease in foreign capital inflows in the capital markets and d) decrease in Foreign Direct Investment (FDI). However, the country could see a marginal increase in exports and foreign tourist arrivals and their spending in India.

Reserve Bank of India (RBI) currently has the benefit of substantially large foreign currency reserves of USD 405 billion plus. The apex bank has capacity and will to intervene in the market (meaning selling of USD to the tune of 18-20 b). Such interventions lead to Open Market Operations (OMO). These OMOs would require

Though RBI also says that it would let the market forces prevail and will let the Rupee find its natural level. Still, a rate of Rs. 70 against USD is unfavourable for the Indian economy.