
The recent selloff in the rupee to a record low has generated much debate amongst economists, policy makers and the general public. Changes in currency polarity are fundamental to any country’s economic growth as it impacts on imports, exports, investment, prices among others. Hence, though India is witnessing relatively lower value for its rupee against other currencies like dollar, this is one issue where change actually implies scope for growth inasmuch it is a real challenge.
Intended as an overview of the seven major effects of rupee’s record low on growth, the given paper carries the author’s learning intention aimed at aiding the reader to understand this phenomenon.
Contents
- 1 1. Boost to Export Growth and Global Competitiveness
- 2 2. Inflationary Pressures and Domestic Consumption
- 3 3. Impact on Foreign Investment Inflows
- 4 4. Rising Import Bills and the Current Account Deficit
- 5 5. Challenges for the Corporate Sector
- 6 6. Tourism and Overseas Education
- 7 7. Policy Responses and Economic Reforms
- 8 Conclusion: Turning Challenges into Opportunities
1. Boost to Export Growth and Global Competitiveness
The most apparent resultant of a weaker rupee is the sector of exports that has borne the brunt of this development. While the rupee weakens, the Indian exports their products and services at more cheaper prices overseas. It increases the consumption of Indian products and results into exportation rate therefore enhancing the revenue. It is therefore advantageous to key sectors such as textiles, pharmaceuticals, IT services, agriculture and so on. For instance, many Indian IT companies get their revenues in forms other than rupees, such as the US dollars.
A weaker rupee will give them more revenues when measured in Indian currency and therefore expanded combined profit margins. Likewise, it is observed that raw agricultural products such as rice and spices are better demanded in global markets due to the effective price advantage. However, the story is not all that happy either. Those exporting firms that depend on imported raw materials or parts experience supply chain delays and hence high costs of production. Managing these cost factors effectively while realizing the potential that the competitive advantage brings is the key factor in steady export expansion.
2. Inflationary Pressures and Domestic Consumption
This means a depreciating rupee goes hand in hand with increase the cost of Imports, for example crude oil, fertilizers, electronics among others. Currently, India meets about 80 percent of it crude oil requirement through import hence the fuel prices are greatly volatile with the different currencies. Hence the cost of execution in transportation, logistics and other operational costs cause inflation due to increased fuel prices.
Inflation alters the purchasing power of consumers, their expenditure is a result of that. Increase in the prices of products to the extent that even basic products may compel households to ration their expendable income hence affecting spending on other items which include; sale of consumer goods, entertainment, and property. Central banks can intervene by increasing the interest rates to tame the inflation this have additional effect of reducing borrowing and investments.
This one of the largest threats that are associated with a lower exchange rate of rupee in relation to other global currencies such as the US dollars. It becomes necessary to check its impact on economic development by appropriate use of monetary and fiscal policies.

3. Impact on Foreign Investment Inflows
Direct and portfolio investments are very vital in determining the growth of Indias economy. While there is an agreement that a weaker rupee will reduce these inflows, it can also have conflicting impacts. Foreign Direct Investment (FDI) which involves long term investments in industries may rise during such occurrence because of the depreciation.
Existence of stronger dollar render India to be cheaper to invest in due to a weaker rupee. For instance, the investment in fixed assets such as establishing a manufacturing plant or investment in stakes in Indian companies is relatively more attractive. But FPI which is a short-term investment in the country’s stocks tends to fall. Fluctuations in value of currency and concerns being made due to ability to earn lower returns there by mobilizing capital through out flow.
This also puts pressure on the rupee which continues the process of ongoing depreciation of rupee and capital flight. It is only possible to achieve economic stability and ensure further investment development if these opposite trends are monitored and regulated.
4. Rising Import Bills and the Current Account Deficit
Thus, India is a net importer, although it is highly dependent on crude oil, gold and machinery. Whenever there is a depreciation in rupee against dollar, the cost of these imports goes up affecting the overall import bill of the country. This in turn increases the Current Account Deficit (CAD), which explains the differential between the imports and exports of goods, services and capital.
High CAD exerts pressure on foreign exchange and repel the foreign investors hence affecting the foreign exchange reserve. Attracting foreign investors and stabilising the CAD becomes a policy concern for any country because the debt level for an extended period harms the economic structure of a country. Overcoming such a state of supply is possible only through the systematic stimulation of domestic production and reducing import dependence.
5. Challenges for the Corporate Sector
These effects give a bipolar outcome in the corporate sector concerning the rupee depreciation. Those companies that export receive increasingly higher revenues and profit margins, those companies that import raw materials or components experience rising input costs. SMEs are especially at the risk since they cannot spend a lot of money to protect their earnings from fluctuating exchange rates.
Increasing costs make their margins thin and to recover their losses they can raised prices or analyze the viability of their operations. It also implies that through foreign currency debt repayment, companies face high repayment cost, which put more pressure on their balance sheets. To avoid such challenges, companies require effective risk management strategies like use of foreign exchange hedges and elongation of supply chain.
6. Tourism and Overseas Education
Trade and tourism as well as education is also heavily affected by the depreciation of the rupee. International tourisms, where Indian people tour out-side, becomes costly and as a result of this; there is a lesser number of people on the move. On the other hand, figure of inbound tourism increases as India turns out to be cost affective vacation to most tourists. Such increased flow is beneficial to the hospitality, transport and local retail sector since it increases employment opportunities and contributes the country’s economy.
In the same way, education seeking students bear more additional costs in terms of high cost tuition fees and student accommodation in foreign exchange. A lot of families begin to regret their decision, think of domestic educational options as more feasible. This trend could lead to efforts to increase the quality of Indian institutions, which has a positive impact on the sector in the long tail.
7. Policy Responses and Economic Reforms
Frequent depreciation of rupee is often followed by alarm bells which are to remind the policymakers about the other vulnerabilities in the economy. There are two specific ways through which the government or the RBI might intervene to control the volatility in the exchange rate: by increasing interest rates, directly intervening in foreign exchange market or giving bonuses to exporters.
Policies that would stimulate the growth and production of locally manufactured products, enhance product localization and containing the fiscal deficits are cardinal. In the long run, measures add up to improved economy stability, coherence and one that can stand young shocks and inevitable futures. This is in part due to a weaker rupee showing the need for diversification of foreign exchange and an increase in the necessity of bilateral trade to fall under foreign exchange value risks.

Conclusion: Turning Challenges into Opportunities
This record low rupee is not India’s unique story alone but a story of uncertainty, tensions and issues happening at the global and domestic level. It does pose major challenges but at the same time creates possibilities for further building up the basis of the Indian economy. This phase can be used by India to develop a less import dependent economy by encouraging exports, getting more foreign investments and even though it is not member of the WTO yet it can take advantage of the WTO by being a part of the WTO.
It has been said that understanding the interrelationships of exchange rates is a matter of concern of every businessman, customer, and policy maker. Feeling the heat of a weaker rupee has to be viewed as the opportunities rather than the threats as long as long term planning and efficient implementation of reforms are being contemplated.
Source : Buzz Artical & HSUX Solutions