The Indian Rupee (INR) is in a downward spiral of sorts. It has depreciated against all major currencies. In fact, recently the INR touched a new low of 57.3 to the US dollar. So, what has led to such a sharp depreciation in the INR?
It is a known fact that the price of any asset is a function of its demand and supply. And considering that the growth in Indian economy has slowed down global investors shunned Indian equities. This has put a downward pressure on rupee. Widening current account deficit is another reason. A current account deficit results when imports are more than exports. Now it must be noted that India's imports majorly constitute of crude and gold which is bought and sold in dollars. Thus, increasing imports increase the demand for dollars. And this increases the supply of rupee as people sell rupee to buy dollars. This puts a downward pressure on rupee.
Deficit refinancing is another area of concern. Containing fiscal deficit by money printing increases the money supply in the economy. This stokes inflation and impacts the rupee.
So, what steps have to be taken to curb a further downfall in INR? A partial intervention by Reserve Bank of India (RBI) is a quick fix solution. Creating an investment friendly climate is another option. Right now, bureaucratic impediments in India have hurt the investment sentiment of overseas investors. Reducing red tape can attract significant amount of money via FII (Foreign Institutional Investment) and FDI (Foreign Direct Investment) route in India. This should help rupee gain some strength.
Curbing fiscal and current deficit can also go a long way in supporting rupee. Phasing out of subsidies in a gradual manner should reduce fiscal deficit. This eliminates the need of deficit financing and thereby excess money supply in the economy. In terms of containing current account deficit government will have to take steps to make exports competitive. Providing tax sops to exporters and access to cheap credit are a few ways by which this can be done.