Falling value of Indian rupee is a setback for the economy

The weak Indian rupee is raising concerns about the impact it could have on the country’s economy. The rupee has fallen by 6 per cent against the US dollar this year, currently trading at around 68 rupees (Dh3.69) to greenback. It is among Asia’s worst-performing currencies this year, tumbling to an 18 month low last week.

This is good news for Indian expatriates in the UAE, who can buy more rupees when remitting their dirhams, which is pegged to the dollar. While it is good for Indian’s living abroad, it is a threat to the Indian economy as weaker currency makes imports more expensive, leading to wider deficits.

“Adding to the woes is the rupee’s depreciation, which increases the cost of imports, particularly of oil,” according a report by Crisil, a ratings and research firm which is part of Standard & Poor’s.

Foreign investors have lowered their holdings of rupee-denominated government and corporate bonds by 4.4 billion rupees this quarter, which is the highest reduction on record, according to Bloomberg.

The weakness in the rupee is “a headwind for the India economy”, says Devang Mehta, the head of equity advisory at Centrum Wealth Management in Mumbai.

Despite worries that the rupee could lose further value, there are some who argue that the Indian currency’s weakness has not reached panic level.

The likelihood of a complete rout of the rupee such as the one experienced five years ago today seems low, Shilan Shah, the senior India economist at Capital Economics, says.

“There is no need to panic. The current account deficit is much smaller now compared to 2013 and foreign exchange reserves are close to record highs, giving the Reserve Bank of India scope to smooth volatility in foreign exchange markets and prevent dramatic drops.”

He predicts that the rupee will rebound against the dollar over the coming months. The currency could gain some support if the RBI raises interest rates.

“The sharp rise in core inflation and hawkish commentary from the RBI has reinforced our view that the central bank will hike interest rates much sooner than generally anticipated.” says Mr Shah.