. First, India’s imports comprises of essentials such as crude petroleum, machineries and fertilizers which become expensive raising their prices facilitating ‘import’ of inflation. India is very susceptible to a stubborn and sticky inflation. It hurts the masses in terms of across the board higher prices.
All imports become expensive including raw materials, goods and machineries which further push up domestic costs. It brings with it negative sentiments in the economy, makes investors cautious weary of investment and consumers’ reducing spending in the economy. Thus, growth takes a down turn.
Negative sentiments and capital outflows impact the stock markets, which may not directly affect the common man but gets reflected as part of negative sentiment in the economy. It widens the current account deficit, which may require dipping into scarce foreign exchange reserves and their ‘relative adequacy’ could well become ‘inadequate’ if the deficit continues to widen. One cannot forget the situation of 1991 when India had no other recourse of meeting the deficit by pledging its official levels of gold and seeking commercial loan from International Monetary Fund.
There are genuine concerns arising out of a depreciating currency of the domestic economy having larger faith in foreign rather than the domestic currency and as mentioned previously, the looming fears of currency crisis.
However, a depreciating rupee does make exports cheaper as the same dollar can now get more rupees. But exports are not only a function of prices but other aspects such as quality, ability to meet changing demands and preferences, global demand, efficient logistics, cargo-handling capacities, etc. Response to the historic depreciation of the rupee has, for the first time, tested how much Indian exports are sensitive to prices or can lower prices drive up exports from India. The impact cannot be immediate, of an overnight increase in exports depreciation is a correction’ and in the long run help India in achieving export (price) competitiveness.
