THE GIST of Editorial for UPSC Exams : 26 August 2019 (Currency capers: On falling rupee (The Hindu))

Currency capers: On falling rupee (The Hindu)

Mains Paper 3: Economy
Prelims level: 72 mark
Mains level: Measures taken to strengthen the rupee

Context

• The rupee is back in the news following a sharp depreciation in its value versus the dollar in the last one month after a prolonged period of relative stability.
• It has weakened by a little over 4% since mid-July and on Friday nudged the 72 mark to a dollar before retracing its steps.

Market trend

• The fall has to be seen in the context of the overall weakness in currencies of emerging markets and Asia in August.
• The Turkish lira, Brazilian real, South Africa’s rand, the Mexican peso have all uniformly lost value versus the dollar with the Argentine peso losing the most, but this has more to do with the Argentine economy’s woes.
• The trigger was China’s devaluation of the yuan to below the 7 per dollar level for the first time in more than a decade; the last time that the yuan was seen below the 7 per dollar mark was during the global financial crisis in 2008.
• The yuan’s devaluation is itself a part of the complex trade war that Beijing is now waging with the United States whose President has labelled China a currency manipulator.
• Emerging market currencies have also been depressed more since the bond yield curve inverted in the U.S. last week when yields on 10-year bonds fell below the two-year note signalling the market’s fear of a recession in the U.S. economy.
• While there’s no data to support such fears as of now, the trade spat with China seems to be giving the jitters to the market.

Influence on economy

• The fall in the rupee is, of course, influenced to some extent by the overall economic slowdown and the sell-out in the equity markets in the last couple of months leading to capital withdrawal by foreign portfolio investors.
• The capital outflow particularly has hit the currency’s valuation. But the fall is no cause for alarm as yet because there is stability on the external account with the current account deficit at a comfortable 0.7% in the quarter ended March 2019.
• Of course, export growth is depressed but the forex reserves are at historically high levels of $430 billion. In fact, the fall will make India’s exporters competitive.

Way forward

• Economists often complain that the rupee is over-valued in terms of the real effective exchange rate making exports uncompetitive.
• The Reserve Bank of India does not appear to have intervened in support of the rupee, signalling that it is not uncomfortable with the fall.
• The central bank can be relied upon to enter the market if things get too depressing for the currency.
• The Finance Minister’s announcements on Friday are sure to perk up the markets on Monday and the rupee may yet bounce back. But, eventually, in an environment where other major emerging market currencies are depreciating, the rupee cannot be an outlier.

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Prelims Questions:

Q.1) Consider the following statements about ICRIER
1. It was established in August 1981.
2. ICRIER’s office is located in the institutional complex of India Habitat Centre, New Delhi.
3. ICRIER’s main focus is to enhance the knowledge content of policy making by undertaking analytical research that is targeted at informing India’s policy makers and also at improving the interface with the global economy.

Which of the statements given above is/are correct?
a) 1 only
b) 2 and 3 only
c) 1 and 2 only
d) All the above

Correct Answer: D
Mains Questions:
Q.1) What are the key measures need to strengthen the rupee?