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The Indian rupee continues to depreciate against the American greenback, falling to all-time low of $54.60 USD. Recently, this catapulted action by the central bank to redeem further damage to the local economy. The Indian currency fell to extraordinary lows against the dollar after the release of weaker than expected industrial output data. Since August, the currency has lost 16.6 percent of its value and has been labeled as the weakest currency in Asia.
According to Livemint.com, the performance of the rupee on a comparative basis showed a trend not observed in any of the other Asian currencies, after the U.S. downgrade by S&P on August 5. The Indian rupee has been the hardest hit among currencies of similar nature along with Asian economic linchpin, China. The Chinese renminbi lost marginally about 1.06 percent against the U.S. dollar and moved ahead of the Malaysian ringgit, which fell almost 5 1/2 percent, with the Korean won losing just 8.22 percent so far.
A currency’s external value declines when its imports weighs more than its general exports because it expands the trade gap and increases pressure on the economy as a whole. In the case of India, nearly 70 percent of its oil demand is met by imports. As a result, the plummeting currency will eventually increase import bill and will lead to a rise in oil prices and contribute to inflation.
Recently, the reserve bank of India intervened in their local market to stop the drastic and financially dangerous movement of the national currency by way of bringing some refinements to existing laws. One of the moves was to create a ceiling on foreign investment for $5 billion in government securities and equities.
The reserve bank also made it mandatory to bring back capital raised overseas and included that all forward contracts made by exporters and importers will be on the basis of delivery. It is possible that the list of restrictions have yet to be exhausted.
Durgesh Mehta, CFO Bombay Dyeing said: “I believe the RBI’s move will provide some relief and arrest further decline, but these measures alone cannot prevent rupee depreciation in the median term.”
According to Professor Amartya sSn, winner of the Noble Memorial Prize in Economics Sciences, he stated during an interaction with the press that the “depreciation of Indian rupee needs to viewed holistically and not as a train crash.”
Over the last two years, India has witnessed the trend of RBI’s addiction to failure through its battle to calm inflation. This has so-far only produced tighter monetary policies, leading to economic slowdown by increasing the cost of borrowing and nothing more than that.
Even today, stubborn inflation lives on in India after many years of fierce battle by the RBI, where-in efforts were largely focused on “Monetary Control” measures rather than identification and elimination by other means.
The RBI has so far been a disaster when it comes to containing inflation, but with its depreciating currency, economists will be anxious to see how far this move can make a difference.