Q What does a falling rupee imply for the Indian economy?

l N.R. BHANUMURTHY: Although short-term exchange rate movements mostly work as an automatic stabiliser on the external account, a fall in trend value is expected to have differential impacts on different segments of the economy. The conventional view is that a falling rupee props up exports and discourages imports. But it needs empirical verification. Recent trends suggest that within exports, a falling rupee can have a differential impact on goods and services exports, exports earnings in the short term, and real exports in the medium term to long term.

l ADITI NAYAR: A weaker INR will bloat the costs of importers and may simultaneously buffer exporters against the higher costs of inputs and wages that are being experienced in some sectors. A falling rupee will also contain the benefit of the recent correction in commodity prices. This may affect government expenditure on some items such as fertiliser subsidy, and also limit the improvement in the domestic inflation readings going ahead. We also remain watchful of services inflation, given the strong demand for services post the pandemic. Overall, we now project FY2023 inflation at 6.5 per cent, lower than the MPC’s forecast of 6.7 per cent.

l DHARMAKIRTI JOSHI: The first negative effect is on inflation. Our estimates show ‘imported inflation’ contributes to as high as 60 per cent of WPI inflation, up from an average of 30 per cent in the past five years. The impact on consumer inflation has been less, but as that has already breached the RBI’s tolerance limit of 6 per cent, a falling rupee is an additional headache. Second, it makes servicing of foreign debt costlier. According to the RBI’s latest Financial Stability Report, 44 per cent of India’s external commercial borrowings were unhedged last fiscal. That said, a weak currency supports exports to an extent and helps reduce trade deficit. But that benefit is now waning with global demand slowing.

l DR AJAY SAHAI: The falling rupee is a big concern, particularly at a time when we are fighting inflation. Since our imports are more than exports, it will make many sectors less competitive. One has to look into relativity and therefore no thumb rules apply to rupee depreciation impacting exports. ■

“The conventional view is that a falling rupee props up exports and discourages imports. But it needs empirical verification”

— N.R. BHANUMURTHY, V-C, B.R.A.S.E. University, Bengaluru