Should you be concerned of the weakening Rupee ?

With globalization, currency movement not only depends on economic scenario of a country, but it also depends on the overall global macroeconomic environment. Hence, allong with domestic factors, the current depreciation in rupee value is also due to global factors.

The domestic factors that contributed to rupee weakness are

  • Burgeoning Fiscal Deficit
  • Widening Current Account Deficit (CAD)
  • Capital Account Outflow

Global factors are

  • Strengthening US dollar
  • Rising crude oil prices
  • Turkish Lira crisis.

Fiscal Deficit

The biggest threat to our economy – fiscal deficit keeps increasing year by year. According to official data released on 31st May, 2018, the central government had met its revised fiscal deficit target of Rs.5.92 trillion for 2017-18 which is 3.52 per cent of the full year’s nominal Gross Domestic Product (GDP) of Rs.167.73 trillion. However, the target was revised to 3.52 percent from 3.20 percent estimated earlier. Finance ministry attributed the fallout of demonetisation and rollout of a nationwide Goods and Services Tax (GST) effect on economy to the revision.

Indian government is making many moves on the revenue side to bring down the fiscal deficit. Some of them are privatization of public sector units, introduction of GST, auctioning and allocation of natural resources. However, the budgeted outlays for the proposals introduced in the Union Budget for FY19 such as Minimum support price (MSP) and the National Health Protection Scheme, fuel and other subsidies, and bank recapitalization, would affect the fiscal space for spending over the course of the year.

Current Account Deficit

Trade deficit is the largest component of the current account deficit and refers to a nation’s balance of trade or the relationship between the goods and services it imports and exports. The gap between import and export of goods and services increased and pushed the trade deficit for the full year to a five-year high. According to RBI data, trade deficit widened to $156.80 billion in 2017-18 compared with $108.5 billion in FY17.

The net outgo through import of crude oil, the largest commodity imported, is $88 billion in FY18 against $70 billion in FY17. In case of gold (the second largest commodity imported), the net outgo is $34 billion in FY18 13% higher than it was in FY17.

Capital Account

The growth rate of net foreign direct investment (FDI) in FY18 has recorded a five year low of just 3%. Gross FDI inflows in FY18 is $61.96 billion against $60 billion recorded in FY17. In the first quarter of the current fiscal year foreign investors in capital market has been net sellers.

Currency trading india Should you be concerned of the weakening Rupee ?

Net selling by foreign portfolio investors (Rs. In crores)

MonthEquity MarketDebt MarketTotal
April 20186467.911868.318336.2
May 20184977.317543.0922520.39
June 20181899.5510005.6511905.2
Total13344.7539417.0452761.79

However, in July 2018 they have turned net buyers to the tune of Rs.490.67 crores in equity market and Rs.178.22 crores in debt market.

Strengthening US dollar

US dollar, the investment and transaction currency in international market was consistently strengthening at the backdrop of economic growth in US economy. US dollar index has been rising against all six major currencies. It has risen 9.88% to a high of 96.86 on 15.8.18 since its low of 88.15 on 16.2.18.

Rising Crude Oil Prices

Crude oil bill is the largest among our import bill. About 80% of our fuel needs are met by imports. Crude prices has increased by more than 180% in the last 2 years. It is estimated that every dollar per barrel change in crude oil prices will impact import bill by Rs.823 crore. The higher import bill will lead to more increase in trade deficit.

Turkey Crisis

The fallout of higher import tariff on Turkish commodities levied by US proves to be detrimental not only to Turkey but also to global economy. The sanctions added to the woes of Turkish economy as it was already reeling under recession. Following the sanctions by US on Turkey, its currency Lira has lost more than 50% of its value. This affected all major currencies worldwide, with European currencies being affected the most.

Conclusion

The current fall in rupee value is however more due to global financial scenario. The fear of global trade war, collapse of Turkish Lira along with rising crude oil prices and strong dollar has all contributed to the fall in Indian rupee value. However experts and analysts are of the view that the current fall in rupee is a healthy one as currently it is overvalued. They say gradual depreciation of rupee is good. Many feel Indian economy is more resilient now than it was earlier. This fact can be gauged from the recent data on fiscal deficit which is well contained as per estimates mainly due to buoyancy in GST collections and dividends and disinvestment proceeds. Further, India has healthy foreign-exchange reserves of around $400 billion as on August 17, 2018. Nevertheless, trade deficit has to be contained to arrest adverse effect on Indian currency. This can be done by concerted effort by all Indians to conserve fuel and energy and follow the “Make in India” concept.

Data Source:
  • Fiscal Deficit – BusinessStandard.com updated June 1, 2018
  • Trade Deficit –  EconomicTimes.com Updated April 13, 2018
  • Crude Oil Import – Business Standard updated April 24, 2018
  • Gold Import – Business Standard April 3, 2018
  • FDI Inflow – EconomicTimes.com updated June 8, 2018
  • FII investment in capital account – moneycontrol.com
  • Forex reserves – rbi.org.in

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