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- Foreign institutional investors have withdrawn over $33 billion since October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