What are the pros and cons of a strong Rupee? What can be done to strengthen the currency?

 

Over the past several months, there has been a steady decline in the Indian Rupee’s (INR) exchange rate relative to the US Dollar ($). Since the commencement of the conflict in Ukraine and the rise in crude oil prices, the rupee has been declining.

Reasons for fall of Rupee:

  • The crisis between Russia and Ukraine, the skyrocketing price of crude oil, and the tightening of financial conditions worldwide are all global causes. 
  • The Federal Reserve of the United States raised interest rates. 
  • FIIs continue to withdraw funds.

Pros of weak rupee:

  • Theoretically, a weaker currency should increase India’s exports, but given the current state of global uncertainty and the country’s poor demand, this may not be the case. 
  • Favourable effect on India’s exports 
  • An increase in domestic demand. 
  • Travel to India is becoming more affordable, which would eventually help the tourist sector. 
  • Increased remittances 
  • Improved return on foreign investment.

Cons of weak rupee:

  • Increased import bill.
  • Many vital domestic imports (such as crude oil and edible oil) will become more expensive, fueling domestic inflation. 
  • The central bank may find it challenging to keep interest rates at historic lows for much longer due to the possibility of imported inflation. 
  • Approximately two-thirds of India’s domestic oil needs are imported. 
  • India is a significant importer of edible oils. A weaker currency will drive up the price of imported edible oil, resulting in increased food inflation. 
  • Trade and current account deficits are widening.

Way forward:

Although the exchange rate has reached a historical low of 80, the Indian Rupee has performed better than other currencies of emerging nations. The rupee will continue to decline due to the difference in inflation rates between the US and India. Nevertheless, India can stabilize its currency value by taking aggressive fiscal and monetary actions.

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