![]() With the exception of July and August–each month in 2022, FPIs turned net-sellers of Indian assets in the debt and equity markets, with the calendar year seeing a total of $23.2 billion in FPI outflows by the end of October. In turn, FPI outflows can further push the rupee to depreciate. The rupee has a complicated relationship with the moody foreign portfolio investors (FPIs). Therefore, while there is comfort to be found in the link between rising imports and a strong domestic economy, gains from the export side remain elusive. The rising REER also points to an overvalued rupee–indicating the possibility of further depreciation so as to fall in line with macroeconomic fundamentals. The value of the currency is falling in nominal terms, making imports more expensive–but rising in real terms, essentially wiping out the possible benefits of cheaper exports. India’s woes lie wholly in this growing gap. While the NEER has been falling, pointing to a nominal depreciation in the value of the rupee, the REER has risen, indicating an appreciating rupee in real terms. In recent years, India has seen a growing divergence in the values of the NEER and REER – particularly due to higher prices in India as compared to its export partners. The real effective exchange rate (REER) is the NEER adjusted for inflation–the NEER is adjusted by the ratio of domestic prices to foreign prices to give the REER. The nominal effective exchange rate (NEER) is a trade-weighted currency index–a rise in the NEER indicates an appreciation of the local currency against a weighted basket of currencies of its major trading partners. Even indicators of international competitiveness such as the NEER and REER show limits to the export-led benefits of a depreciated rupee. Although service exports have done fairly well in FY 2022-23, merchandise exports have remained subdued and could soon worsen due to economic downturns in Europe and the US. Unfortunately, there is a reason that warrants for some worry on the export side. The import bill has risen not only on the back of a raging dollar and hardening crude prices but has also been spurred by strengthening domestic demand and manufacturing–as evidenced by a robust Purchasing Manager’s Index (PMI) of 55.3 in October. The net effect of these opposing forces would determine the impact of a depreciating currency on an economy.Ī brief glance at the statistics points to a widening trade deficit, with the rise in imports far outstripping the rise in exports and the first quarter of FY 2022-23 seeing the highest current account deficit (CAD) in nearly a decade. However, there also exists a ray of hope–a depreciated currency implies cheaper, more competitive exports and therefore, a possible export-led boost to the domestic economy. The first phenomenon is one of the biggest worries caused by a falling rupee–a rise in import costs, threatening higher inflation and a widening trade deficit. The article attempts to diagnose the extent of three macroeconomic phenomena in the Indian economy to better assess the impact of a falling rupee–focusing primarily on the trends in trade, the behaviour of foreign investment, and the response of the Reserve Bank of India (RBI). Even economic theory does not always peg a depreciating currency as a harbinger of doom. While this fall has triggered much speculation and worry, the rupee’s depreciation should be assessed in a larger, more nuanced context. Centre for Security, Strategy and TechnologyĪlthough India is far from a crisis given the safe cushion of forex reserves, it bodes well to be prudent, but without stifling growth.
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