Understanding the Fall of the Rupee

The rupee's exchange rate recently fell below ₹90 a dollar, raising questions about the reasons behind the fall, its implications for the Indian economy, and whether this should be a cause for alarm.

Reasons for the Rupee's Fall

• Negative fundamentals: Increased trade deficit, higher current account deficit, and negative foreign portfolio investments (FPIs).
• Forex reserves decline.
• Tariff-related expectations regarding an India-U.S. trade deal that hasn’t materialized.
• Limited intervention by the Reserve Bank of India (RBI) to manage forex market volatility.
• Ongoing portfolio outflows increasing the demand for dollars.
• Higher import growth compared to export growth.
• Uncertain tariff agreements impacting investor sentiment.

Does a Falling Rupee Indicate Economic Weakness?

• No correlation with economic weakness.
• Robust GDP growth and performance.
• Strong balance of payments and adequate forex reserves covering 11 months of imports.
• Economy’s fundamentals remain strong with robust growth, benign inflation, and fiscal consolidation.

Potential Benefits of a Falling Rupee

• Theoretical benefits include enhanced competitiveness for exports.
• Depreciation may offer a price advantage against high tariffs.
• Limited inflation impact due to low CPI components' dependency on imports.
• Exporters benefit through better realizations and may offer higher employee bonuses, boosting consumption.