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Economy: Weakness of rupee may increase problems

Economy: Weakness of rupee may increase problems
Indian rupee has reached its lowest level. The rupee has depreciated on record against the US dollar. As of today, one US Dollar is equal to 77.65 Indian Rupees, this is called as exchange rate. This means that if you have one US dollar, you can get 77.65 Indian Rupees instead (for easy understanding point of view we are not including broker's commission etc. in the calculation). Last year on 28 May 2021, one US dollar was equal to 72.34 Indian rupees. This means that the rupee has weakened by about 7.34% in one year, which is worrying. So now today's reality is that the Indian rupee has crossed the psychological level of 77 against a dollar and has reached its lowest level.

This decline has come at a time when the US Federal Reserve has not stopped raising interest rates and inflation has emerged as the biggest challenge in India (just as the Reserve Bank of India is the central bank of India, like the United States of America). The central bank is called the Federal Reserve Bank, also known as the FED.

With the record fall in the rupee, the country's foreign exchange reserves have gone below $ 600 billion (be aware that one billion means 1 billion, then 600 billion means 600 billion and if it is considered today's rate of 77.65 Indian If we look at the rupee, this amount is about 46,590 billion rupees or about 46,59,000 crore Indian rupees, another interesting fact is also that the market capitalization of India's largest company Reliance Industries is about 17,18,000 crore, this means It so happened that in the foreign exchange reserves with India, about 2.71 Reliance Industries should go).

The fall of foreign exchange reserves is not good for any economy, so the Reserve Bank of India has intervened in the money market, but its intention was to stop the decline, not to reverse the trend. Now the Reserve Bank had taken steps to strengthen the Indian rupee, so RBI has sold a lot of dollars to strengthen the Indian rupee, due to which the foreign exchange reserves are $ 45 billion lower than the all-time high of $ 642 billion on September 3, 2021. Done. Given the current uncertainty, the RBI wants to maintain the forex reserves at $ 600 billion. Though the foreign exchange reserves are still sufficient for 12 months of imports, it may deplete sharply.

Inflation in America, the world's largest economy, is at a 40-year high. To deal with this inflation, the US Federal Reserve has announced an increase in interest rates after almost four years and has given clear indications of six more such hikes this year. Federal interest rates will be between 1.75 percent and 2 percent by the end of the year, while federal interest rates could reach 2.8 percent by the end of 2023. Earlier the interest rate in America was almost zero. Investors from all over the world are now moving to the US due to the increase in interest rates by the US central bank. Global investors borrow from countries with zero or low interest rates to invest in properties around the world. This is called 'carry trade'. The interest rate in the US was almost zero before this hike. In such a situation, investors used to take loans from there and invest in other emerging economies including India, where the interest rate is high. This 'carry trade' was behind the boom in the Indian economy during the Corona period, but now the 'carry trade' is reversed. This is the reason why foreign institutional investors are continuously selling their investments and withdrawing their investments. In the current financial year 2022-23, since April till now, foreign investment of $ 5.8 billion has been withdrawn from the Indian market. In such a situation, the pressure on the rupee is natural.

Indian policy makers can set the rupee depreciation by proper management. Even during the year 2008 to 2011, the global economic scenario was critical, but the Indian rupee was continuously strengthening. Due to the weakness of the rupee, diesel and petrol can become expensive. Edible oil is also expected to be costlier, but exporters may benefit from the weakness of the rupee. By higher exports, India can not only take advantage of the increase in trade balance, dollar stock etc., but can also bring the Indian economy back on track. This requires war-level preparation.

Despite this, it has to be kept in mind that the Indian economy is basically an import-based economy. In such a situation, the government will have to take all possible steps to strengthen the rupee. The best way to do this is to encourage FDI in Indian industries. There is a need to strengthen the fundamentals of the economy to encourage FDI. This is the reason that when the economy is strong, the rupee often also strengthens. Only increase in exports and foreign direct investment can strengthen the falling rupee.
Keywords: – Exchange rate, Inflation, US Federal Reserve, Federal Reserve Bank, Forex Reserves, Reserve Bank of India, Carry Trade, Foreign Direct Investment.

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