Depreciation of currency is when value of home currency decreases with respect to other currencies in international money market. Drastic depreciation of Indian rupee has been observed within last one year.
Boiling crude oil prices
Increase in crude oil prices is one of the major reasons for depreciating Indian rupee. The problem is further worsened by the restriction imposed by United States of America on India to continue business transactions with Iran which has impacted India in a very negative way as Iran was the third largest oil supplier after Iraq and Saudi Arabia. Apart from all this due to geographical factors India was able to save much on its shipping and carriage cost on oil imports from Iran. Almost 10% of crude oil is imported from Iran by India which means a tenth of its crude oil prices increases which will further widen our current account deficit by 0.4%. Foreign
reserves highly affected by these changes in the international market which may be countered by further RBI intervention to stop the further draw down of foreign reserves with India. Most of the output produced in India heavily relies on the imported oil and gas and an increase in the prices of gas and oil will increase its import bills. This widening trade deficit will deteriorate India’s trade position with respect to other countries in the market as it will increase the overall cost of production and transportation in the economy and will bring output growth down to negative. The increase in cost of production of domestically produced goods will make our exports less competitive in the market and will further bring pressure on domestic currency.
Decreasing Exports will further widen current account deficit. Current account is one of the major factor that determines exchange rate of a currency. If a country is having current account deficit which means excess of foreign reserves going out of the country to the foreign reserves entering in the economy which will decrease the demand our domestic currency in the international market and will lead to depreciation of weak currency. China is the largest consumer of oil today. According to a forecast of global energy consultancy India will overtake China in terms of oil demand by 2025. The report also states that demand for crude oil is expected to grow by 34 million barrel per day from year 2017 to 2035. This rise due to increasing income levels and growing middle Crest due to which there is a increase in the need
for mobility. A ISI report states that in year 2019 the import bill of oil could rise by $114 billion. The overall import bill for 2017-2018 was about $ 88 billion. To break this stagnancy in growth the economy needs to reduce its reliance on crude oil but its constant increase in per-capita consumption will keep the economy exposed to boiling crude oil prices.
US China trade war impacting rupee
The trade war going between the two major powerful economies of the world has bought negative effects on the growth of other economies. In this trade import quotas and higher tariffs on Chinese imports of worth $250 billion by Trump government in order to decrease trade deficit. Devaluation of Chinese Yuan due to decrease in exports will made its goods more competitive in the market as compared to Indian Exports as the country is not participating in the currency war. This will widen trade deficit and current account deficit and will negatively impact Indian rupee as well.
To compensate the loss of goods that the China was exporting to US on which the tariffs are increased and China will now find markets where these goods can be dumped for a reasonable return. India is the ready made market for these Chinese goods having a population of 1.4 billion and has a reasonable purchasing power. However demand for Indian exports in the Chinese Market may also increase for ready made garments and alcoholic beverages but the amount of increase in imports will be much more than the Exports due to import elasticities of these cheap products. Hence Global trade and capital markets will get deeply affected by this trade war between two major giants. IMF predicted that this trade war may slow down the global economy by more than 0.8 % till 2020. Our domestic income and the Employment generation in downstream industries and export sectors got deeply affected by this full blown trade war. This will exert pressure on various other macroeconomic indicators to tackle depreciating INR. Apart from this India will also get opportunity from this trade war to increase its exports to the US and China. According to a report of UNCTAD that of $250 Billion Chinese goods on which US tariffs are imposed 82% of them will be captured by other countries and 12% it will be retained by Chinese forms itself , 6% of these goods will be captured by US firms.
India may not get opportunity to capitalize from this trade war as India and China export different goods to United states. The goods that are imported by US from India include raw materials, minerals, semi finished goods and pharmaceuticals, organic chemicals iron and steel and China Exports semi-finished goods, plastics and electronic goods to US. Apart from this Indian exports are not much competitive to too many of the items that China exports to US. On the other hand in the long run import quotas and higher tariffs imposed by US incentivize more and more manufacturing bases in China to shift to other countries which will again open up new opportunities for India. This may not be here an easy task for India as the country will face stronger competition from other economies like Malaysia, Vietnam and Indonesia or other ASEAN economies which are Ranked much higher than India in the World bank ‘ease of doing business index’ . Other economy like Cambodia, Laos, Bangladesh and Myanmar are though ranked lower then India in this index but will give significant incentive to attract more and more amount of increase in imports will be much more than the Exports due to import elasticities of these cheap products. Hence Global trade and capital markets will get deeply affected by this
trade war between two major giants. IMF predicted that this trade war may slow down the global economy by more than 0.8 % till 2020. Our domestic income and the Employment generation in downstream industries and export sectors got deeply affected by this full blown trade war. This will exert pressure on various other macroeconomic indicators to tackle depreciating INR. Apart from this India will also get opportunity from this trade war to increase its exports to the US and China. According to a report of UNCTAD that of $250 Billion Chinese goods on which US tariffs are imposed 82% of them will be captured by other countries and 12% it will be retained by Chinese forms itself , 6% of these goods will be captured by US firms.
India may not get opportunity to capitalize from this trade war as India and China export different goods to United states. The goods that are imported by US from India include raw materials, minerals, semi finished goods and pharmaceuticals, organic chemicals iron and steel and China Exports semi-finished goods, plastics and electronic goods to US. Apart from this Indian exports are not much competitive to too many of the items that China exports to US. On the other hand in the long run import quotas and higher tariffs imposed by US incentivize more and more manufacturing bases in China to shift to other countries which will again open up new opportunities for India. This may not be here an easy task for India as the country will face stronger competition from other economies like Malaysia, Vietnam and Indonesia or other ASEAN economies which are Ranked much higher than India in the World bank ‘ease of doing business index’ . Other economy like Cambodia, Laos, Bangladesh and Myanmar are though ranked lower then India in this index but will give significant incentive to attract more and more FDI from China and will prove to be a strong competition for India to relocate firms to these countries.
Apart from the competition faced Chinese investment to India will also be constrained by regress regulations exercise by RBI which includes transfer of immovable property by citizens of select countries to India. These are be regulations does not allow a person from selected countries including China to transfer or buy immovable property in Indian territory without getting prior permission from RBI.
To curb depreciation
Initiatives can be taken by the government to curb the over alarming current account
deficit by cutting down on imports of non-essential goods and taking initiatives to encourage exports.
Making investor friendly environment
More and more foreign Reserves can be bought into the system by bringing more FDI into the economy and this can be done by relaxing the rigorous norms of RBI of inviting FII Investments. Making our Government Bonds available to different investors and attracting non resident investors towards these bonds will inject more foreign Reserves into the economy.
The Reserve banks being the central banking institution has a number of instruments that can be used to curb depreciation. Some examples of these measures can be not regulating interest rates on deposits made by non resident Indians and taking necessary actions to arrest speculative trading. Indian norms related to transferring or acquiring immovable property in India by non residents of selected Nations as this is blocking the way for India to invite more and more manufacturing bases shifting from China.
Attracting manufacturing bases
In order to attract the shifting manufacturing bases from China to India Government can offer incentives during this trade war. Government can provide preferential tax rate or heavy tax concessions during their initial years of operation. According to a trade document released by Bloomberg the industries that need to be incentivize include electronics, electric vehicles, toys consumer appliances and footwear. It is the best way to tap this opportunity to curb consistent currency depreciation. This will help India’s manufacturing sector to grow and will be proved to be a huge support to ‘make in India’ initiative which aims to achieve 25% boost in manufacturing sector by 2020. Doing all this will help India in multiple ways by reducing its trade deficit with China and will generate a large amount of employment in its manufacturing as well as services sector. This will also narrow are trade deficit with many other developed
countries including USA as it will result to increase in our Exports.
References
View: This trade war cloud has a silver lining for India (E. Contributors, Trans.).
(2019, May 17). Retrieved July 6, 2019, from
https://economictimes.indiatimes.com/news/international/business/view-this-trade-warcloudhas- a-silver-lining-for-india/articleshow/69363595.cms
TAN, W. (Ed.). (2018, August 28). Rising oil prices could take a bite out of India’s
economy. Retrieved July 6, 2019, fromhttps://www.cnbc.com/2018/08/28/rising-oilpricescausing- trouble-for-indian-rupee-and-trade-deficit.html
Causes and Consequences of Depreciating INR 