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Rupee depreciation– An analysis

The Indian rupee has begun this week’s trading session by inching slightly higher to close below 80 against the US dollar. This, however, is hardly encouraging as the currency has lost a whopping 7% from the start of 2022, and according to a recent report, it may fall further to 82 per dollar in the near term. But the RBI is of the view that the movement of Rupee has remained ‘relatively smooth and orderly’.

A weakening Rupee, is, no doubt a concern as it may result in higher prices of importing goods including crude oil, which in turn will increase the trade gap and short-term inflation as well as higher interest rates as a result of RBI’s effort to bring down prices, but according to some economy watchers, the Rupee depreciation is likely to benefit the country’s export sector even amid the environment of weak global demand.

Meanwhile, according to reports, the RBI – which “can afford to spend even $100 billion more if required” – is ready to defend the currency from extreme volatility. The central bank has recently allowed trade settlements between India and other countries in Rupee. This is a positive move and in synchronization of which the Centre should clarify on benefits on such export transactions which were earlier available only on foreign currency export transactions. Meanwhile, foreign investors have turned net buyers in July, with a net investment amount of nearly Rs 1,100 crore in Indian equities. This is encouraging, particularly in the background of a net withdrawal of Rs 50,145 crore in the previous month. It is also a relief that raw material prices have normalised now, our export competitor China’s Yuan has witnessed a similar depreciation along with Rupee, and more importantly the fundamentals of the Indian economy is still strong