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Why in the news?

Indian Rupee from Asia’s best to worst in 2 weeks

Present Context:

• The Indian rupee has turned into Asia’s worst-performing currency from being the best in the previous quarter.
• It’s poised for more losses as a resurgence in coronavirus cases to a record threatens to hamstring the economy.
• The rupee weakened past 75 per dollar for the first time in eight months this week.

Rupee fall:

• From trading at a level of 72.38 USD, the Rupee slipped to levels of 75.42 thereby witnessing a decline of 4.2% in a matter of three weeks.
• It lost 43 paisa to a dollar, hitting a nine-month low. Data shows the Rupee has been one of the biggest losers over the last three weeks as concerns are growing over rising Covid cases and its impact on economic activity across the country

Comparison with other countries:

• The Rupee has been one of the weakest emerging market currencies over the last 3 weeks as has lost 4.2% since March 22 against dollar.
• In the same period, only the Turkish New Lira has lost more than the Rupee as it declined 4.36% against the dollar.
• While Brazilian Real has lost 3.99% in the same period, Russian Ruble has weakened by 3.25%.
• Thai Baht and Indonesian Rupiah have lost 2.33% and 1.5% in the same period against the dollar.

Key reasons for India’s performance?

• Rising Covid numbers — over 2 lakh fresh daily cases — have emerged as a key concern.
• As several states are now considering more stringent lockdown measures, market participants are concerned over delay in the recovery of the economy that was hit hard in 2020-21 by the pandemic.
• The Rupee’s fall is mainly due to the global factors like:
  • Increasing crude oil prices, US-China trade war which will have ripple effect on other emerging economies by affecting the downstream industries
  • Strengthening US dollar attracts foreign investors to USA, leading to outflow of FPI from India. Reduced dollar inflows will affect exchange rate
  • Others fragile economies currency such as Turkey’s Lira , Argentina peso, South Africa’s Rand have also been worse affected due to FPI outflows
• Impact of Falling Rupee:
  • As India meets 80% of energy needs through imports, weak rupee will widen Current Account Deficit (CAD) to 3%.
  • Rise in prices of essential imports like fuel will affect transportation sector which is indispensable food supply, tail end consumers have to face wrath of Inflated prices
  • Domestic companies with external loans now have to pay higher charges.
• Mitigation measures:
  • RBI can intervene in market by shedding some Forex reserves
  • RBI can maintain inflation by hiking interest rates
  • Recent government measures to promote Rupee denominated bonds, tapping NRI investors by floating NRI bonds, Easing FPI norms . These measures can provide short term relief from rupee’s devaluation trends.

Better growth in US:

• Besides, the strengthening of dollar in line with expectations of better growth in the US economy, has also put pressure on the Rupee.
• While the Dollar was trading at 1.233 to a Euro in early January 2021, it is currently trading at 1.189 to a Euro and has gained over 3.5%.Since March 1, 2021, the Dollar has gained close to 1.5% against the Euro.

About Printing Money:

• The Reserve Bank of India (RBI) recently coined a new term for money printing, calling it the government securities acquisition programme or G-SAP.
• A simple explanation for the rupee losing value lies in the fact that the RBI plans to print money.
• The RBI will conduct the first round of purchase of government securities worth 25,000 crore on 15 April.
• The money to buy these securities will have to be printed.
• This means there will be more rupees in the system than before, and hence, the rupee is losing value against the dollar.
• RBI has been printing money and buying bonds, even before the recent G-SAP announcement.
• The G-SAP announcement was a formalization of what the RBI has already been doing through ad hoc open market operations.
• From January to March, net-net, the RBI printed money and bought bonds worth 79,700 crore.

Why did the rupee not lose value through January to March, as it has been doing in April?

• The answer lies in the fact that the RBI, in its recent statements, has made it very clear that it is batting for the government and will do whatever it takes to keep yields or returns on government securities low.
• To keep the returns on government securities low so that government can borrow at a low cost,
• The RBI will have to ensure that there are enough rupees going around in the system. And for this, it will have to keep printing money.

US bond yield:

• On the other hand, the return on American government bonds has been going up since early February.
• If this continues, it means money will leave India and go to the US.
• This will mean an increased demand for the dollar.
• The foreign exchange market is adjusting for this possibility and driving down the value of the rupee.

Way forward:

• Promotion for ‘domestic production’ like Make In India, Green Revolution etc ( Less import dependent)
• “Currency devaluation proof” initiatives like Advanced Pricing Agreements etc.
• Promotion of domestic/common currency in regional groups. For ex: Euro in EU.
• Establishment of pool of financial resources to face unforeseen events. For ex: IMF fund, ‘Contingency Reserve Fund’ in BRICS.
• Relaxing norms of FII investments so that more foreign investment can thrive in.
• Forming authorities like Monetary Policy Committee to supervise and take measures against inflation and/or depreciation of currency.
• Strengthening and Universalizing the domestic currency in international market by taking measures like.
  • Export promotion
  • Domestic currency bonds in foreign market
  • Making economy stable

Mains oriented question:

The rupee’s depreciation would trigger a slew of issues in the Indian economy. Examine the root causes of the problem and propose solutions to the problem? (250 words)