Falling rupee, widening trade deficit

Falling rupee, widening trade deficit

Recently, the rupee had come down to a record low; this is the first time that the rupee has crossed the level of Rs 79 per dollar.

Reason for recent fall in rupee

  • The Russo-Ukraine War and other factors have led to an increase in the prices of crude oil and other commodities like edible oils.
  • India imports about 85% of its petroleum product demand.
  • Central banks around the world (especially the US Federal Reserve) have changed their monetary policies to combat high inflation.

Some other reasons:

  • Continued capital outflows from Foreign Institutional Investors (FPIs) from India due to rising bond yields and higher valuations in the US and the threat of a recession in the US.
  • Foreign institutional investors have withdrawn over $33 billion since October
  • Domestic factors include; Increase in current account deficit, inflation etc.

Effect of Rupee depreciation

  • The Reserve Bank of India’s efforts to contain the fall in the rupee has led to a fall in forex reserves.
  • The widening of the trade deficit has widened the gap between the current account deficit and the balance of payments.
  • It also helps in promoting exports through increased competition.

Source – The Hindu

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