20 Feb 2025 Indian Express Editorial


What to Read in Indian Express Editorial( Topic and Syllabus wise)

Editorial 1 : RBI’s Rupee Challenge

Context: India is vulnerable to a currency crisis.

 

Exchange Rate Dynamics and RBI’s Dilemma

  • Global Context
    1. Capital Outflows: Pressure on the rupee stems from global capital seeking safe havens (e.g. the US dollar) due to geopolitical uncertainties and Trump-era policies.
    2. Dollar Strengthening: The US dollar’s rise reflects global risk aversion, impacting emerging market currencies, including the rupee.
  • RBI’s Challenge
    1. Intervention Risks
      • Depreciation Acceleration: A sharp rupee fall could trigger further capital outflows, creating a self-fulfilling cycle.
      • Signalling Effect: Non-intervention by the RBI may signal weakness, worsening expectations.
    2. Trade-offs
      • Defending the rupee drains forex reserves.
      • Allowing depreciation risks inflationary pressures (e.g. higher import costs for oil).

 

Long-Term Trends in Rupee Depreciation

  • Historical Data
  1. Steady Decline
    • Rupee/USD exchange rate rose from 45.56 (2010-11) to 82.78 (2023-24).
    • Exceptions: Brief stability in 2017-18 and post-2008 rebound which ended in 2011.
  2. Monthly Trend: Consistent depreciation since September 2023.
    • Underlying Causes
  3. Inflation Differential
    • India’s inflation rates exceed global averages, eroding rupee’s purchasing power.
    • Currency depreciation further fuels inflation via costlier imports.
  4. Structural Trade Deficits
    • Persistent current account deficit.
    • Remittances and capital inflows (e.g. FDI, portfolio investments) bridge gaps but create dependency.

 

Structural Economic Vulnerabilities

  • Export Competitiveness
  1. Weak Manufacturing Exports: Lack of competitiveness limits FDI inflows tied to export-oriented sectors.
  2. Dependence on Volatile Capital: Reliance on portfolio flows (vs. stable FDI) increases vulnerability to sudden outflows.
    • Forex Reserve Management
  3. Reserves as a Buffer: RBI uses reserves to stabilize short-term volatility.
  4. Limitations
    • Reserves are finite; prolonged intervention erodes capacity.
    • Reserves depend on capital inflows exceeding current account deficits.

 

Risks of Currency Crisis

  • Historical Precedent
  1. Global examples (e.g. East Asian Crisis 1997) highlight risks of sudden, sharp depreciations.
  2. Periods of stability punctuated by irreversible drops (e.g. 2013 taper tantrum).
    • Persistent Vulnerability
  3. Liberalization Legacy: Post-1990s reforms increased exposure to volatile capital flows.
  4. No Structural Fix: Depreciation has not corrected trade deficits or boosted export competitiveness.

 

Policy Implications

  • RBI’s Balancing Act
    1. Manage Expectations: Avoid signalling panic while preventing excessive volatility.
    2. Inflation Control: Tackle domestic inflation to reduce depreciation pressure.
  • Structural Reforms Needed
    1. Export Competitiveness: Boost manufacturing via policy incentives and infrastructure.
    2. Reduce Import Dependency: Diversify energy sources to mitigate oil price shocks.
    3. Stable Capital Flows: Encourage FDI over volatile portfolio investments.

 

Conclusion: India’s exchange rate management has avoided a full-blown currency crisis but remains structurally vulnerable. Addressing root causes (trade deficits, inflation, export weakness) is critical to reducing reliance on volatile capital and ensuring sustainable stability.