Explained: What a falling rupee means for the Indian economy

The rupee hit an all-time closing low of 78.29 to the dollar on June 13. On Wednesday, June 15, it opened at 77.99 against the US dollar after gaining 5 paise. Considering the prompt initiatives by the Reserve Bank of India (RBI), it is unlikely there will be much volatility in the currency going forward, said analysts.

Here are five aspects related to the rupee’s fall in the context of the Indian economy:

Liquidity steps: Analysts pointed out that the RBI will try to inject some liquidity through purchases in open market operations (OMOs) in September. “The Fed (US Federal Reserve) will also do something similar but the intensity will drop after September and then RBI will have some space to go for OMOs or some other unconventional tools to add liquidity in the system,” said Arnob Biswas, head of forex research, SMC Global.

Global quantitative tightening of monetary policy: According to analysts, the RBI might have been a little late to act but has taken the right steps to ensure maximum stability. Quantitative tightening of monetary policy by various central banks is likely to roll out and the focus will be to stay ahead of the curve, they said.

Impact on bond market and volatility: Considering the prompt initiatives by the RBI, it is unlikely there will be much rupee volatility going forward, said analysts. “That will not have a negative repercussion on the bond market. If the currency starts to depreciate rapidly, it can lead to outflows from the bond market, which is already under pressure. The RBI would continue to intervene and ensure that volatility is low,” said Anindya Banerjee, head of research for forex and interest rates, Kotak Securities.

Rise in capital inflows: One of the major positive impacts of a weaker rupee is a rise in capital inflows. “Rupee depreciation attracts a lot of FIIs (foreign institutional investors) and boosts capital flows both via the FDI (foreign direct investment) as well as the FPI (foreign portfolio investment) route. Moreover, the trend shows that after every rupee depreciation cycle comes a period of a stock market rally,” said Saurabh Goenka, CEO and managing director, Zenith FinCorp, a treasury management firm.

Competitive exports: According to experts, the rupee depreciation makes the export market more competitive leading to a rise in shipments from the country. “Exports from India will be competitive vis-a-vis other emerging markets and that way our total export budget goes up, thereby adding to trade receipts,” said Goenka.