Falling rupee carries many costs, limited benefits

The RBI is faced with a perfect storm - a triple whammy of low economic growth, high inflation, and a secular weakening of the domestic currency vis-àvis the greenback and other major currencies.

- ABHISEK SUR AND AMARENDU NANDY

Recent NSO data show that India’s GDP growth has decelerated to 6.3 per cent in Q2FY’23, with a significant annual contraction of 4 per cent in manufacturing. The projections by major rating agencies, multilateral organizations, and the government’s estimates suggest a GDP growth of 6-7 per cent for the full fiscal, a significant downward revision from the earlier projections of 8.5-8.7 per cent growth.

On the inflation front, the woes are far from over. Though the CPI has eased to 6.77 per cent in October from 7.41 per cent in September 2022, it is still significantly above the lower tolerance level of 4 per cent for 34 consecutive months and above the upper tolerance level of 6 per cent for seven straight months now.

The Indian rupee has witnessed a secular fall since January 2022, and has depreciated by more than 10 per cent, precariously hovering around Rs. 82 against the USD currently. The rupee has also weakened significantly against the Euro, the British Pound and the Japanese Yen in the last quarter.

The rupee remains under pressure from multiple sources, both domestic and global. On the global front, quantitative tightening and interest rate hikes by the US Fed, leading to a continuous outflow of FII funds (amounting to $18.5 billion in the current calendar year) from India, have significantly contributed to rupee depreciation. The strengthening of the dollar index (which expresses the greenback’s strength against a basket of six currencies) by around 16 per cent this year also explains the rupee’s fall. Besides, the Russia-Ukraine war, followed by the sanctions on Russia, and the economic slow-down in China have put further downward pressure on the rupee. India’s exports to China and Russia, the second and fifth largest trading partner, respectively, have fallen by 36.6 per cent and 19 per cent in H1FY23.