Falling Rupee and Role of RBI

NEWS HIGHLIGHTS

Theme : Economics, Finance 
Paper : GS - 3

Last week, the rupee weakened against the dollar past the 81-mark to a record low.Falling Indian Rupee poses a huge challenge in the economy.
Falling rupee: A fall in the rupee against the dollar in the FOREX market means that the Indian currency is weakening. This means that while importing from the United States or any country, India will have to pay more because the payment is done in dollars, i.e., less import costs more.

TABLE OF CONTENT

1. Context
2. Major Problems of Indian Economy
3. Role of RBI

Major Problems of Indian Economy :

• Falling rupee: A fall in the rupee against the dollar in the FOREX market means that the Indian currency is weakening. This means that while importing from the United States or any country, India will have to pay more because the payment is done in dollars, i.e., less import costs more.
• Inflation: Since May this year, RBI has largely managed to control inflation. The RBI managed inflation to keep it below 7.5 % but, looking at the Ukraine situation, oil prices may shoot up again and thereby inflation will rise.
• Growing CAD: India’s current account deficit (CAD) in April-June was at $23.9 billion, or 2.8 per cent of gross domestic product (GDP), much higher than the $13.4 billion, or 1.5 percent of GDP, in January-March 2022. 

Role of RBI :

• Use of foreign exchange reserve: The use of FOREX reserves is appropriate at this juncture. You build your reserves during good times and spend them during bad times. Right now, reserves are being spent in trying to curb currency volatility. RBI can’t defend the rupee at a particular level, because that would be swimming against the tide, which is not possible in this environment. But RBI can make it less volatile.
• Easy dollar supply: RBI has already undertaken measures such as easing provisions for remittances, allowing short-term foreign portfolio investments in government securities, etc. We can even think of a scheme similar to the one introduced in 2014to attract NRI investments.
• Interest rate: Interest rates are being raised not only to control inflation, but also to address external imbalances.
• Managing the CAD: According to experts, RBI can finance the CAD with capital inflows, and prevent hot money outflow with the aid of interest rates, that could be an effective long-term solution.