Forex

Effects of Falling Rupee on Indian Economy

The turmoil of 2018 in emerging markets touched India very closely. The crisis that manifested itself most strongly in Turkey turned into a snowball that made confidence collapse in other developing markets and showed how problems in one part of the world can have an impact on the Indian economy.

While India struggled to protect its economy, other countries could be swept away by volatility. The fear is that the great losses that these nations may suffer will affect the global financial system, as has happened in the past, particularly in the late 1990s, when several Asian nations required financial rescues.

A rescue intervention also has an impact on businesses and is a problem. But India is aware that if an action is taken, it must be taken into account that this will have consequences in the future.

The crisis of the Indian rupee comes with other bad news for the local economy, such as the fall of industrial production, with a marked gap in the manufactures that represent 75% of the Indian industry.

The economic managers are beginning to get trapped between the need to reactivate the economy to stop the industrial fall and to continue its fight against inflation.

In this context, the depreciation of the rupee hinders imports and is particularly harmful to the Indian economy due to the rise in oil prices in international markets, with the consequent inflationary effect.

Why Rupee is Falling?

It is considered that the main reason for the turbulence of emerging countries such as India is the decision of the US Federal Reserve (Fed) to raise interest rates little by little.

The Fed raised its main rate in June 2018 between 1.75% and 2%, and further increases are expected. Interest rates in the United States have been almost at 0 for almost a decade, encouraging investors to buy goods or lend money in emerging markets, hoping to get big dividends.

The increases in the interest rates of the Fed make some American goods more attractive, before which investors are drawing back money from emerging markets.

This brought to light the vulnerabilities of some countries such as Turkey which is considered one of the most exposed countries due to several factors. The Turkish lira lost more than half of its value. Investors also worried about the fast fall of the Indian rupee suffered in 2018 with its biggest monthly loss in three years.

The devaluations of the Indian currency also cause foreign investors to escape to the stocks and bonds of emerging markets. The MSCI Emerging Markets Index fell 15%. The withdrawal of foreign investors aggravates currency problems and increases pressures for central banks to raise their interest rates, which in turn complicates growth.

On the other hand, India’s central banks increased their basic interest rate in part to boost foreign investor profits and renew confidence.

Will Rupee Fall Further Against Dollar?

Indian markets related to finance, such as currencies, are affected by the global events that are taking place at this time and which can be seen with what happened in recent years.

A couple of years ago, the fall in the price of oil caused a reduction in the deficit of the stock market in India, which increased the growth of the entry of dollars into the country and helped the rupee to reassert itself. In this way, internal factors were low but positive thanks to the stability of the government.

For this 2019, global causes are expected to have their effects again but with slightly different results. With what happened in 2018, with the 8% drop in the rupee, it was reduced by 14% in October. The reason was for two reasons: the strengthening of the dollar thanks to Fed rates and the high price of crude oil which had increased to $85. The other cause is still a surprise, we do not know what will happen.

For this 2019, it may be that the rupee shows a little weak as a result of certain external and national factors that will affect the rupee. One of those reasons is the high rate of the Federal Reserve of America, which causes more dollars to be withdrawn, increasing its value.

At the moment, we cannot predict an accurate value for the rupee for this year but if we take into account its value of 2018 (73 rupees per dollar) there is the possibility that the rupee reaches 75 per dollar by the end of this 2019.

Reasons for the Downfall of Rupee Value

The increase in oil prices that have reached up to 85 dollars, is one of the factors that has most affected the Indian rupee. As the country imports more oil than it needs, payment made in dollars, the increase in the price per barrel, benefits the American currency, clearly affecting the rupee, a price that is believed that will increase.

Another reason is the deficit since in the first fiscal quarter of 2018, it has expanded by 15,800 million dollars, and already represents 2.4% of GDP, compared to 1.9% in the previous quarter. This value is expected to continue rising, resulting in the continuation of the depreciation of the value of the rupee.

Will Rupee Rise Against the Dollar?

Still, it is not possible to have a clear prediction on whether the Indian rupee will rise against dollar in this 2019 as there is a lot of instability in the country’s market due to different factors such as elections, changes in FDI, and changes in plans America with respect to the system of generalized preference that India offered, causing changes in exports, similarly, the commercial conflict that America has with China, the commercial sanctions that Iran receive from America, the price of oil that goes up and down, between other reasons.

Factors Affecting the Rupee-Dollar Exchange Rate       

The exchange rate is one of the most important aspects of a country’s economy, this is because it determines a large number of economic and political factors externally and internally, thus determining the health of an economy.

This is because the currency market is one that is responsible for establishing the power that one currency has against another, which makes it an object of analysis, also having an impact on expenses and profits of the population. Above all, of those people who send or receive money from abroad relatively frequently.

This relationship between currencies (Dollar-Rupee), in most cases, fluctuates daily due to these main factors:

Inflation

The effect of inflation on the market is due to the fact that the difference in ranges in the generalized price increase between countries affects the appreciation and value that products and services have; being used for the analysis mainly those of first necessity.

In a country whose inflation is always close to 0, it tends to show a gradual increase in power in its currency, while those with high inflation suffer from depreciation.

Interest

Although it is difficult to understand, the fall or decrease in interest that certain countries apply strongly affects the power of the currency, mainly due to its relationship with high inflation.

Since, when the interest rates are higher for the lenders, foreign investors consider this country much more attractive for business, which always results in a greater amount of foreign capital and, therefore, in a considerable increase in the type of change.

In this way, the basis for a country to increase the position of its currency is the rise of interest and the control of inflation.

Terms of Change

The direct blow in the term of change is caused by the fact that it depends and is directly related to the relationship between exports and imports; this means, the balance of payments and the solvency of a State.

In this way, a higher income, product of a greater amount of exports than imports, results in the strengthening of the currency and an appreciation with respect to another; usually the dollar.

Political stability

Countries with greater political stability are also more able to attract foreign capital (USD) by increasing the value of the local currency. If the country is more politically unstable, foreign investors will tend to look for other more stable refuge destinations and therefore the local currency will depreciate.

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