Why in the news ?
- A sustained fall of the rupee ”” it dropped another 72 paise Monday to a record low of 72.45 against the US dollar, as the current account deficit widened to five- year high in the first quarter of the current financial year, to $15.8 billion or 2.4%, of the GDP.
More in the news
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As per the official statement, steps would be taken to arrest the fall in the currency.
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It includes deposit schemes for non-resident Indians along with central bank intervention, the rupee strengthened to 72.18 but again lost steam during the end of the trading session.
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Currency dealers said the central bank is not intervening aggressively as before. In June, the RBI had sold more than $6 billion in the spot market.
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According to dealers, investors are concerned over economies that are expected to experience worsening balance of payments position.
Policy rate by RBI may increase
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Two key worries that a sharply depreciating rupee pose for the government are the rising cost of raising funds abroad for Indian companies and the risk of expensive imports, especially petroleum products, feeding domestic inflation.
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This may prompt the Reserve Bank of India to increase policy rates in its October policy review.
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Higher interest rates will moderate demand at a time when GDP growth rates are gaining momentum, which the government may not desire in a year leading up to national elections.
CAD scenario
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The other big worry is of a higher current account deficit (CAD) due to increasing crude oil prices.
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It has already widened to a four-quarter high of 2.4 per cent of GDP in the first quarter ended June 2019, while CAD excluding transfers stood at a four-year high of 4.1 per cent.
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The current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the goods and services it exports.
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The current account includes net income, such as interest and dividends, and transfers, such as foreign aid, although these components make up only a small percentage of the total current account.
Source
The Hindu, Indian Express