Key Facts on Rupee Depreciation
- Current Level: Indian Rupee has weakened beyond 94 marks against the USD
- Primary Driver: Widening Current Account Deficit (CAD) due to high crude oil prices (breaching USD 100 per barrel)
- Exchange Rate System: India follows a managed floating exchange rate system
Difference: Depreciation vs Devaluation
| Aspect | Depreciation | Devaluation |
|---|---|---|
| Meaning | Fall in value due to market forces (demand/supply) | Deliberate downward adjustment by government/Central Bank |
| Control | Market-determined | Policy-driven |
Major Causes of Rupee Depreciation
1. Widening Current Account Deficit (CAD)
- Rising CAD heavily inflated by crude oil imports
- Oil prices breaching USD 100 per barrel mark
- Increased import costs pressure the currency
2. Geopolitical Supply Shocks
- Escalating tensions in West Asia
- Uncertainties surrounding Strait of Hormuz
- Sustained high energy prices
- Compounding domestic inflation concerns
3. Capital Flight & Safe-Haven Shift
- Sustained Foreign Portfolio Investment (FPI) outflows
- Global investors pulling capital from emerging markets
- Shift toward traditional safe-haven assets (US Dollar)
4. Equity Market Contagion
- Macroeconomic anxiety and war-related uncertainties
- Significant profit booking in domestic markets
- Sensex and Nifty indices fell
RBI Measures to Manage Depreciation
- Forex Market Intervention: Selling dollars from foreign exchange reserves to reduce volatility
- Monetary Policy Tightening: Raising interest rates to attract foreign capital inflows
- Liquidity Management: Through Open Market Operations (OMOs) and repo/reverse repo operations
- External Commercial Borrowings: Easing ECBs to promote foreign inflows
- Trade Balance Improvement: Working with government to curb non-essential imports and boost exports
Limitations of RBI Intervention
- Cannot reverse long-term structural pressures (trade deficits, high oil prices)
- Constrained by foreign exchange reserves
- Excessive intervention can tighten domestic liquidity
- May impact economic growth
Constitutional/Policy Context
- Article 292: Empowers borrowing by Union government (relevant for external commercial borrowings)
- RBI Act, 1934: Governs monetary policy and exchange rate management
- Foreign Exchange Management Act (FEMA), 1999: Regulates foreign exchange transactions