The third largest economy in Asia is currently on a breakable footing and the slump in its currency is already nearing a lifetime low. The weakness in the Indian rupee is expected to turn into a major issue, relating how crucial it is in determining the inflation, account arrears and macroeconomic stability, this can obstruct the recovery in India.
The rupee appears to have a place among the worst hit currencies in the current times, which have plummeted about 8 percent against the USD since last month and is currently near the 59 mark. Meanwhile, currencies in Indonesia and Thailand have plunged by just 2 percent and 5 percent respectively, during this span.
Investors are afraid that scaling back of the monetary spur by Federal Reserve that supported investment in India in recent few years may injure India’s capacity to fund the huge current account deficit especially if an egress of cash causes a sharp depreciation in the value of rupee.
Weakening in rupee is speculated to worsen the economy here, and the fall of rupee against USD by 10% will augment the current account discrepancy in the country by 0.4% of GDP and might add about 0.6-0.8% to the ongoing inflation.
Investment downturn and lowered consumption has pushed India to witness a long duration of sluggish economic activity. The first quarter showed just 4.8 percent growth which is far below the 8-9 percent growth rate that the country experienced during the global financial crunch.
Export currently is more demand specific rather than price sensitive and the important demand is largely inelastic due to constraints in the domestic supply chain, a weak currency is intended to affect the current account balance more adversely.
On the brighter side, the weakness in currency and motivate the government to augment the reforms to attract increased capital flow by increasing the foreign direct investment limit in fields like telecom, defense, commodity exchanges and asset reconstruction companies.
On the positive side, however, the bank added that currency weakness could prompt the government to speed up reforms to attract greater capital inflows by raising the foreign direct investment limit in areas such as defense, telecom, asset reconstruction companies and commodity exchanges.