Daily News Analysis ‘Currency Depreciation ’ : 22 May

Why in News:

• The Indian Rupee has experienced sharp market depreciation against the United States Dollar due to rising global crude oil prices and heavy speculative capital outflows.

Rupee Depreciation and Market Intervention Core Facts:

• Depreciation Drivers: A currency depreciates under a floating exchange rate system when market forces lower its relative value; currently driven by high import costs and global capital flight.
• Non-Intervention Theory: Mainstream economic models suggest letting the currency depreciate naturally to automatically make imports costlier, boost export competitiveness, and close a Current Account Deficit (CAD).
• Weak vs. Falling Rupee: A stable weak rupee supports long-term exports, but a rapidly falling rupee prompts global buyers to delay purchases expecting even lower prices later.
• Front-Loading Influx: If consumers expect the currency to drop further, they accelerate the import of essential items like oil today, which worsens the short-term trade deficit.
• Speculative Capital Flight: The downward trend is heavily amplified by liquid outflows from Foreign Institutional Investors (FIIs) moving money to safer, higher-yielding advanced markets.
• Imported Inflation: Leaving the currency unchecked risks severe imported inflation by driving up local prices of essential energy commodities and straining consumers.
• The RBI Intervention Policy: To prevent disruptive volatility, the Reserve Bank of India (RBI) sells US dollars from its foreign exchange reserves, absorbing excess local currency to stabilize expectations.