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One way to protect the rapidly falling rupee against the dollar is the strategy of Wait and Watch.

New Delhi : There was a time, when the depreciation of the rupee against the dollar and the age of the PM were compared. Even today questions are being raised about its softness. The rupee has depreciated more than 10 per cent against the dollar so far this year. On 20 October it went to 83.26. This is its lowest level ever. Finance Minister Nirmala Sitharaman says that the rupee is in better shape than many other currencies. The currencies against which the dollar is strengthening, there is a big decline in all of them. Let us first know what is the condition of dollar and other currencies.

Dollar and other currencies

At present, more than 80 percent of trade in the world is being done in dollars.

About 65 percent of the foreign exchange reserves held by the central banks of all countries are in dollars.

The rupee has fallen by 10 percent so far this year, while the Japanese yen has softened by more than 22 percent.

– The South Korean won and the British pound have fallen by 17-17 percent.

The euro has also fallen by more than 14 percent so far this year.

The value of the Chinese Renmibi has dropped by 12 percent.

Why dollar is getting stronger
The whole of Europe is suffering because of the Ukraine war. Inflation is skyrocketing from Germany to France, Britain and Turkey. The danger of recession is being expressed once again in the world. Whenever the risk associated with the economy rises, investors tend to gravitate towards the dollar that is considered safe. Another factor is the US Federal Reserve raising interest rates. It has increased its policy rate by 3 per cent from March this year. Due to this, foreign investors have started withdrawing money from other emerging markets and India, as they are seeing better risk-free returns in the US.

current account deficit
Another factor behind the increasing pressure on the rupee is India’s increasing current account deficit. When more money has to be spent on imports than what is earned from exports, a situation of current account deficit is created. Exports from India increased during the Kovid epidemic. But now this is not happening. In September, exports also declined. If this continues, then in the year 2022-23, this current account deficit can go up to 4 percent of GDP. This will be the highest level in the last 10 years. The current account deficit is at risk of further widening due to crude oil imports. Crude oil exporting countries have decided that they will reduce production by 2 million barrels per day from November. This will increase the price further.

What should India do?
Now come to the question that what can India do in terms of rupee. Inflation in developed countries is at a four-decade high. There is an increased risk of recession. Therefore, there has been a decrease in the demand for India’s goods and services. This can be compensated by increasing the demand in the country, but only to a certain extent. In such a situation, let us see what are the options before the Government of India and how effective they can be.

1. The first solution is to reduce the tax to increase the demand for goods and services in the country. This will increase the demand for goods and services, the economy will be stable. But the reduction in tax will affect the revenue of the government. Anyway, according to the general budget, the fiscal deficit in the financial year 2022-23 will be around 6.4 percent of GDP. Now the level of debt has also increased a lot. The ratio of government debt to GDP has become almost 90 percent. In view of these circumstances, there is very little scope for the government to provide fiscal help.

2. Another solution is that RBI sells dollars to reduce the pressure of rising demand for dollars. RBI has also done this. But this did not work, on the contrary, the foreign exchange reserves decreased by about $ 110 billion in a year. Selling dollars could have helped if the current account deficit was modest. But this is not the case.

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3. The third solution is, if the interest rates are increasing in America, then the RBI should also increase the interest rates. But the problem is that the US Federal Reserve has indicated to increase the interest rate by another 125 basis points. There is no scope for such an increase in India as it can cause a major setback to the economic recovery.
Rupee Vs Dollar: Rupee is becoming lean against the dollar! A new record of decline was made, crossed the figure of 83
RBI don’t take load
In such a situation, it seems right that foreign exchange reserves should not be used to support the rupee. RBI should not interfere in the movement of the rupee unless there is a sudden sharp fall in it. Let it fall as far as it falls according to the market. There are advantages to this strategy as well.

1. One advantage is that there will be no need for such large use of foreign exchange reserves. If the foreign exchange is saved, then it will be useful to save the economy from any sudden external shocks.

2. Secondly, if the rupee remains soft, Indian exports will benefit.

3. In order to reduce the trade deficit and current account deficit, it is necessary to increase exports along with reducing imports.

4. China’s dominance in the global market seems to be decreasing somewhat. To fill that gap, the government will have to take steps like subsidizing exports. But the weakness in the rupee can prove to be more effective in this case.

Overall, this strategy has more advantages, less disadvantages. The good thing is that RBI has now come on this path. Care has to be taken only that the rupee does not become so weak that the import bill increases very much.

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