Published : Wednesday, 27 August, 2014 02:49 PM
MBA aspirants must be updated with General Awareness on current topics. General awareness topics with analytically drawn conclusions will benefit you in Essay writing / GD & PI. Today, you will read General Awareness Topic:
A Weak Indian Rupee: Advantages & Disadvantages
Almost a year ago, Indian National Rupee (INR) witnessed its worst time where its value slumped to the record low nearing 69 per dollar in August, 2013. However, gradually things improved and now the Rupee value is currently hovering around 60 per dollar.
At one point of time, for instance in 1991 when Rupee was devalued, any fall in the value of Rupee was never appreciated mostly because it was considered to be the blot on the country’s prestige. How a fall in the value of national currency could bring cheers to the nation?
Till 1991, India’s trade engagement with the rest of world was very limited and India was considered to be a closed economy. With little contact with the outside world, the impact of devaluation or evaluation of currency was also very limited. But after 1991, when the era of LPG (Liberalization, Privatization and Globalization) started, a new era was ushered where India expanded its horizons and became the part of the global market. System of exchange rate determination was also changed 1990s when fixed exchange rate (determined by Reserve Bank of India) was replaced by flexible exchange rate system (determined by market forces).
As India embarked on market economy, grounds for analysing the impact of change in Rupee value also changed. Now it is analysed on the basis of its practical impacts on the economy.
Negative impacts of Rupee depreciation over an economy are –
- Depreciation strengthens inflationary forces. When the inflation rises, prices of goods and commodities shoots up. Therefore, the purchasing power of the rupee falls down.
- A depreciation of the domestic currency results in higher import costs for the country. Failure of a similar rise being experienced in the prices of exportable commodities is going to result in a widening of current account deficit (CAD) of the country.
- Foreign Travel and Overseas Education becomes costlier.
- The interest burden would increase on foreign currency denominated debt.
- A large and rapid devaluation may scare off international investors. It makes investors less willing to hold government debt because it is effectively reducing the value of their holdings.
However, there are positives of the depreciation as well and many industries cheer the depreciation –
- Exports become cheaper, more competitive to foreign buyers. Therefore, this provides a boost for domestic demand.
- Travel to India gets cheaper; local industry may benefit.
- Those working abroad can gain more on remitting money to their homeland.
- Ultimately, it assists in reducing the current account deficit.
The ability of depreciation to affect the exports and imports depends upon the demand elasticity of goods and services exported or imported. For instance, if the oil imports are demand inelastic i.e. price of oil has little impact on its import demand, depreciation will have little impact on current account deficit.
Nevertheless, there are some other benefits of depreciation also which doesn’t accrue directly. Rupee depreciation raises the cost of components and goods for import-dependent businesses. It puts them at a disadvantage vis-à-vis companies that are net exporters. So while rupee depreciation seems to be painful in the short term, it may turn out to be a blessing in disguise for the Indian manufacturing sector in the medium to long term.
A cheaper rupee will incentivise Indian companies to export more besides helping them substitute some of the costlier imported goods in the domestic market with local products. Thus, despite strengthening the ills like inflation, Rupee depreciation has its positives and can help in developing the manufacturing base of the economy.