Jan 25, 2000|
Demand for US Dollars takes toll on Indian Rupee
The Indian Rupee hit a 16-month low at Rs 43.66 per US Dollar before closing at Rs 43.62 per US Dollar. The main reason for the sharp depreciation was the lack of Dollar supplies even as demand for the same surged.
The mismatch between demand and supply occurred mainly due to the port strike that has resulted in a slowing down of payments to exporters. The other factors affecting sentiment pertain to the recent surge in oil prices and the border tension between Pakistan and India.
The depreciation of the Indian Rupee will evoke a mixed response from various quarters. While the exporters will get a further boost (exports grew by 33% in November), as their price competitiveness increases, importers will be saddled with higher costs. Generally speaking, this will exert a positive pressure on the trade balance.
A sustained deprecation of the Indian Rupee may not augur well for the Indian economy. This is mainly due to the fact that the foreign debt-servicing burden would increase. The other effects would pertain to a hike in the cost of imported capital goods, which could adversely (though not significantly) affect investment activity.
On the inflation front, the situation does not seem very grim. Imports are currently under 10% of GDP. Therefore, a 5% depreciation in the value of the Indian Rupee would lead to a rise in prices to the tune of 0.5%. This would not be significant, especially given the current low rates of inflation.
The pros and cons associated with the depreciation of the Indian Rupee are wide and varied. In the present context of a fledgling economic recovery, however, depreciation may be both desirable and necessary.
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