Depreciation of Rupee and Its Economic Implications

Current Situation of Rupee

• The rupee has breached the psychological level of 90 per dollar, marking a fall of over 5% since the beginning of the year.
• Balance of payments turned negative by $10.9 billion in the second quarter, compared to a surplus of $18.6 billion the previous year.
• The trade deficit has widened, with expectations of an expanding current account deficit for the financial year.
• The Reserve Bank of India (RBI) is not aggressively intervening in the currency market, which is seen as a sound policy decision.

Influence of Trade Relations on Currency

• The currency depreciation acts as a stabilizer in a scenario of negative balance of payments.
• India faces a 50% American tariff, impacting exports, though some segments have found alternative markets.
• High-value items may be rerouted to the US, but this may not be sustainable.
• India and the US are negotiating a trade deal, expected by year-end, which could have medium-term effects on trade.

Impact on Exporters and Trade Deficit

• A weaker rupee can benefit Indian exporters despite not fully offsetting US tariff disadvantages.
• The rupee's real effective exchange rate has decreased, aiding exporters, but has appreciated against the Chinese yuan.
• This appreciation makes Chinese imports cheaper, potentially worsening the trade deficit with China.

Strategic Considerations for India

• The depreciation favors India by protecting tradable sectors of the economy.
• RBI holds foreign-exchange reserves worth over $688 billion to maintain market order.
• The outcome of India-US trade negotiations will influence the rupee's value, affecting the current and capital accounts.
• Foreign-portfolio investors (FPIs) have sold over $15 billion in Indian assets this year; a favorable trade deal could reverse this trend.
• The Monetary Policy Committee is likely to consider currency developments, but decisions may not be heavily influenced due to the low-inflation environment.