The Editorial Analysis- Making Sense of the Rupee Slump

Table of Contents

Making Sense of the Rupee Slump- Relevance for UPSC Exam

GS Paper 3: Indian Economy- Issues relating to planning, mobilization of resources, growth, development and employment.

On July 1, the rupee breached the 79 per dollar mark for the first time ever. The domestic currency has been dominating the headlines for hitting lifetime lows against the greenback for some time.

Fall of Indian Rupee: In 2022, Indian Rupee slipped 6.7% against the dollar. It is the worst performer among the BRICS countries.
- However, the rupee has fared better than other emerging market currencies including the Philippine peso (8.1% drop), the Thai baht (8.1%), the Chilean peso (12.3%), and the Polish zloty (15.8%).
Rise of Dollar: The dollar index, which gauges the strength of the greenback against six peer currencies, rose by 11% in the same time period.

Fed Interest Hike and Flight of FPI capital: Due to steep interest rate increases by the U.S. Federal Reserve to tame four decades-high inflation, investors have withdrawn from riskier emerging markets and opted for safe haven assets.
- So far, in 2022, FPIs have dumped Indian equities worth a net $29.01 billion, more than double the $11.9 billion worth of equities sold during all of 2008, the year of the global financial crisis.
Widening Trade Deficit: a widening trade deficit has added pressure on India’s current account deficit (CAD), which in turn has added pressure on the outlook for the local currency.
- In FY22, India incurred a CAD of $38.7 billion, or 1.2% of the GDP.
Rising Gold Imports: While India’s production of gold is negligible, the country is the second highest consumer of gold in the world.
- In FY22, India imported gold worth $46.17 billion, which is 33% higher than the year earlier (see chart 5).
- In May, gold imports swelled to $6.02 billion, recording an almost nine-fold jump from a year earlier.

Reduced Forex Reserves: In order to smoothen the rupee’s fall and curb excess volatility, the Reserve Bank of India has been selling dollars in the forex markets from its reserves from time to time.
- The drawdown of dollars by the central bank has dented reserves. From a high of $642 billion in September, reserves plummeted to $593 billion as of June 24, a drop of $49 billion.
- According to the RBI’s latest ‘State of the Economy’ report, the foreign exchange reserves in June were equivalent to 10 months of import, down from 15 months of import cover in September 2021.
Impact of Rising CAD: Incurring a CAD means that India is importing more goods and services and spending on servicing overseas borrowings than it is exporting or earning through remittances, which in turn creates more demand for dollars.

Steps taken by RBI: This selling spree by FPIs has exacerbated the demand for the dollar and led to a corresponding excess supply of the rupee, weakening the local currency.
Countering Rising CAD and Gold Import: In order to rein in the widening CAD and reduce pressure on the weakening rupee, the government raised the import duty levied on gold to 15% from 10.75%.
Cess on Export of Fuel: the government also imposed a cess on the export of petrol, diesel and jet fuel.
- Private refiners have been exporting fuel and earning ‘windfall’ profits while pumps were running dry in some parts of the country.
- High-speed diesel and motor gasoline exports more than trebled in March 2022, while the exports of jet fuel more than doubled.