A Weaker Rupee and you

You are probably aware that the rupee has been falling against the dollar recently (constant newspaper headlines don’t make ignorance easy here). Bold headlines suggest this is problematic for the economy, but is it?
Each currency has a purchasing power (how much one unit can buy). The purchasing power of the rupee has been affected largely by internal inflation. From 2009-2014 inflation was around 10% per annum. Simply put, a soft drink which cost 30 rupees in one year cost 33 in the next. So a currency loosing value that fast in the nation is bound to loose value in the international markets as well. The rupee went from 54 to 68 very rapidly, so buying foreign goods (and imports) became expensive (not to mention all the potential holidays to the US that were cancelled) This sharp fall brought about a panic induced reaction from the RBI and the government, which involved raising interest rates (read: expensive loans) and a major hike in the import duty for gold (so much for the big fat Indian wedding).
Unlike the star wars prequels, here’s why it isn’t all bad news: A weaker currency also means that for an investor the currency feels cheap and that will invite money flow into the country in the form of FDI which is vital for economic growth. If money is flowing out of a country while its currency is falling, then it a problem (Russia 1990) but India does not face that problem yet.
India never adopted an exported oriented growth strategy (scaling up exports to facilitate industrialization) and has been largely dependent on imports. This is why a strong currency was perceived to be good since it helped keep inflation in check. When inflation differentials are taken into account, the rupee was found to be overvalued. This is known as the Real Effective Exchange Rate (REER) of a currency. A stronger rupee means that imports from countries with cheaper currencies rise (China). A rational consumer will account for quality of imports, but if Indian products are as good as foreign, a cheaper currency would give then benefit to India.
In an era of open economies, a currency needs to remain competitive and in Indias’ case a slightly weaker currency can facilitate development and boost exports. With oil prices still relatively low our import costs are not expected to rise significantly because of a weaker rupee. This is different from a free fall in the value of the currency which is problematic if the country has a substantial foreign debt and a weak manufacturing base for exports.
A fairly valued market determined exchange accompanied by low inflation is the ideal situation for any economy.

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