Rupee on a Downward Spiral

When India entered 2018, it did so with a hope of an economic turnaround, bouncing back from the horrors of demonetisation and GST. However, if anything, 2018 has signalled at further distress, stemming from a myriad of bank loots, skyrocketing fuel prices, and bleeding demand deposits. The latest addition to the list is the failing health of the Indian Rupee.

The Indian Rupee has seen a downward trend since the beginning of 2018, falling to a 15-month low of ₹67.13 against the US dollar, which represents a 5.15% fall for the year so far. With the currency expected to weaken further, what is worrying is that the central bank doesn’t have the reserves to dip into to support the rupee, owing mostly to the extremely high fiscal deficits.

A weaker rupee coupled with rising crude oil prices could cause inflation to accelerate at a much quicker rate than anticipated, forcing the RBI to raise the interest rates much earlier than scheduled. Such a scenario, if it arises before the economy reaches a stable footing, could permanently derail the Indian economy from the path of recovery.

While the Narendra Modi government continues to boast about India being one of the world’s fastest-growing economies, the credibility of that tag is weakening day by day. With the US planning to increase interest rates further, capital outflows which stood at a whopping $244.44 million by the end of April this year, are set to increase further, making the Rupee less and less valuable every day.

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