Question 21M.2.SL.TZ0.2b

The fall of the Indian rupee

1. Over the past year, India’s current account deficit widened as the 14 % increase in export revenue could not offset the rise in import expenditure. Over the same period, the value of the rupee (India’s currency) has fallen by 13 %.
   
   
2. The rise in import expenditure was in part caused by higher oil prices following production cuts by the Organization of the Petroleum Exporting Countries (OPEC). Another reason for the increase in import expenditure was the higher spending on machinery and capital goods needed to achieve economic growth.
   
   
3. Exports of services, especially software services, have helped to boost export revenue. However, one critical weakness in India’s exports of services is the lack of diversification. Exports of software services account for more than 41 % of India’s total service exports and more than 90 % of its software service exports are restricted to the United States and the European Union.
   
   
4. The depreciation of the rupee, one of the steepest seen in recent years, has resulted in fears of high inflation. An economist at the Reserve Bank of India (India’s central bank) has warned that the increase in oil prices and consumers’ expectations of rising inflation could worsen inflationary pressures.
   
   
5. Despite calls for an increase in interest rates in order to protect the rupee from further depreciation, the Reserve Bank of India has chosen to keep interest rates unchanged. The combined effect of a fall in confidence and higher interest rates would dampen economic growth. 

Table 1: Selected economic indicators for India

Tulsi Jayakumar, Forbes India, 2018. Reining in Current Account Deficit: Options for India. Available at: http://www.forbesindia.com/article/spjimr/reining-in-current-account-deficit-options-for-india/51455/1 [accessed 19 January 2019]. Source adapted. Reproduced by permission of the author.