DMPQ- What are the Implications of Rupee Depreciation on the Indian Economy?

India’s imports comprises of essentials such as crude petroleum, machineries and  fertilizers which become expensive raising their prices facilitating ‘import’ of inflation.  India is very susceptible to a stubborn and sticky inflation. It hurts the masses in terms of  across the board higher prices.

All imports become expensive including raw materials, goods and machineries which  further push up domestic costs. It brings with it negative sentiments in the economy,  makes investors cautious weary of investment and consumers’ reducing spending in the  economy. Thus, growth takes a down turn.

Negative sentiments and capital outflows impact the stock markets, which may not  directly affect the common man but gets reflected as part of negative sentiment in the  economy. It widens the current account deficit, which may require dipping into scarce  foreign exchange reserves and their ‘relative adequacy’ could well become ‘inadequate’ if  the deficit continues to widen. One cannot forget the situation of 1991 when India had  no other recourse of meeting the deficit by pledging its official levels of gold and seeking  commercial loan from International Monetary Fund.

There are genuine concerns arising out of a depreciating currency of the domestic  economy having larger faith in foreign rather than the domestic currency and as mentioned  previously, the looming fears of currency crisis.

However, a depreciating rupee does make exports cheaper as the same dollar can now  get more rupees. But exports are not only a function of prices but other aspects such  as quality, ability to meet changing demands and preferences, global demand, efficient  logistics, cargo-handling capacities, etc. Response to the historic depreciation of the  rupee has, for the first time, tested how much Indian exports are sensitive to prices or  can lower prices drive up exports from India. The impact cannot be immediate, of an overnight  increase  in exports   depreciation is a correction’ but over a period of time. Many experts feel that the present  and in the long run help India in achieving export (price)  competitiveness. But definitely a slight depreciation can be considered good as long as it is gradual but  not such a steep downslide in such a short span of time can destabilize the economy.

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