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Falling Rupee affecting the Indian Economy
The falling of Indian rupee is a burning issue in Indian Economy. There are various reasons for this–rise in crude prices, portfolio outflows from India due to the selling of stocks, especially by foreign portfolio investors (FPIs), and a growing anticipation of interest rates rising in the US. The Indian rupee is under great stress as overseas investors are paring their exposure to Asia’s third-largest economy amid international uncertainty and mounting worries over the domestic economy.
A depreciating rupee affects the local economy in several ways. It keeps the cost of oil imports high. If the currency continues to depreciate , there is a high chance of India not receiving any benefit because it will have to pay more in local currency per barrel of crude oil which will keep the oil import high.
It may affect the current account deficit as the gap between foreign earnings against expenses. A falling rupee escalates import cost while increasing export revenues in rupee terms. The imports become more expensive and it adds a burden on the economy. In a normal situation , foreign capital inflows help in bridging the which involves both the capital account and current account balances. But , the risks aversion dims the prospect of investors as they might pull themselves out of riskier emerging markets.
The fall of rupee has the potential to fuel inflation throughout the economy as higher oil imports would lead to higher fuel costs which will either raise or atleast keep the pressure on the total cost of economic activity.
If the trend continues , a falling currency might compel RBI to keep policy rates high for a longer period of time.
There would be added pressure on corporate margins as higher imported input and higher local prices add to costs. Even the cooling of global commodity prices might not afford much relief because the cost of imported raw materials will still be high in rupee terms.
Also , rupee depreciation makes Indian goods and services cheaper for overseas buyers, thus leading to increase in demand and higher revenue generation. The foreign tourists would find it cost effective to come to India, therefore increasing the business of hotel, tours and travel companies.
Hence , the exchange rate is a powerful tool that can be used to examine many key industries with fluctuations potentially having a serious impact on the economy, industries, companies, and foreign investors.
Therefore , the Government with the help of various sectors must look in the matter and should try to combat with this issue in order to make Indian economy more stable and flourishing.