The value of a currency is a broad indicator of the fundamentals of the economy. The Indian economy is currently facing troubles on multiple fronts. The GDP growth has touched new lows, inflation rates remain high and economy is facing the issue of twin deficits. And all this is being reflected in the movement of rupee versus the dollar. The domestic currency has recently hit new lows with rupee touching US$ 60 per dollar. This is quite a worrying trend. So what are the ways we can arrest the decline in the rupee? As an article in the Wall Street Journal suggests, this issue can be tackled in five different ways. Let us consider the different options in detail.
One of the ways that the Reserve Bank of India (RBI) can adopt to support the rupee is to sell dollars. However, this is not as easy as it seems. This is because we already have very limited foreign exchange reserves to meet our import needs. It is important to note here that India is quite dependent on other countries for some crucial needs such as crude oil. Hence, such a move might not be sensible considering that it could have serious repercussions for our economy.
The problem of a declining rupee is not new and the Government has in the past taken some steps to address it. One of these is to attract foreign capital in the country through investment in the Government bonds. While the limits have already been raised and might be lifted further, this approach does not sort the issue either. This is because the confidence is low in the Indian economy and there are other economies that are offering higher yields.
The best way to attract foreign capital is to ensure long term foreign investment. In this direction, the Government has lifted foreign investment limits in some sectors. However, on account of lack of clarity and delays in such matters, it is yet to yield the desired results. While such a move will be positive for reforms and growth in the long term, it is unlikely to make an immediate difference to value of the rupee.
Rising inflation is one of the reasons that leads to currency decline. As such, one may think that raising interest rates could support the rupee. However, we cannot ignore that fact that Indian economy is already growing at a very slow rate and such a move is likely to make things worse.
To conclude, India is facing multiple headwinds currently and we are too late in our efforts to let any approach work perfectly for us. If only the Government and concerned authorities could wake up to the need of reforms and right policies in time, our options would not have been so limited.