Depreciation of INR: Causes and Impact on Indian Economy

Abstract

The recent move by the US to exclude India from Generalized System of Preferences (GSP), under which India was getting certain privileges from trading with the US, has created a challenge for the exporters in India. Although very lately, with the heavy inflow of Foreign Portfolio Investments (FPI) in India, especial-ly after the re-election of the Government, the Rupee has started to appreciate, confidence of investors across the world in the Indian economy is shooting up; also the recent trade conflict between China and US is likely to open new opportunities for India to tap the US market. In this paper, the authors have made an effort to understand the gains or losses to the Indian economy with the changes in the Rupee value against US Dollar; the causes as well as the impact of the Rupee depreciation; the macro economic implications of the exchange rate on the country’s trade balance through J curve analysis and various steps being taken by the Government and the RBI to check Rupee depreciation and to enhance exports. The authors are of the view that in the short period of time, exports are likely to pick up, though slowly, since many initiatives have been taken by the Government and the RBI, and an enhancement in the world demand for goods and ser-vices in India is likely to happen; however, over a long period of time, the direction of exports will depend on whether the magnitude of impact of such forces or the effect of Rupee appreciation will be larger and this is something difficult to predicted, given the interdependence of economics across the world. If the Rupee continues to appreciate over the long period of time, then quantity effect may dominate to make exports more expensive and imports cheaper, thereby worsening the trade balance. Continuous measures taken by the RBI and the Government, to stimulate exports and reduces imports and simultaneously, maintain the ex-change rate stability can help the trade balance to improve overtime. To check Rupee depreciation and its adverse impacts, import substitution, export promotion supplemented with attractive funds of non-residential investors in bonds and other schemes should be implemented. Gold imports can be checked by hiking import duties and switching to non-conventional energy sources substituting petroleum and crude oil import.