Rupee Depreciation: Benefit or Loss

The war in West Asia has created conditions of a global economic slowdown. This pessimism has also reached India, and it has come through four different channels—shortage of gas, increase in oil prices, decline in foreign inflows, and a fall in export demand from West Asia.

This is proving to be a significant adverse economic shock for India. The question is: how will the economy adjust to this external environment? What factors will bring stability?

Some forms of stability require government intervention, while others develop automatically without effort. In such cases, the government only needs to keep a watchful distance and avoid unnecessary interference.

For India, the biggest tool for economic adjustment in this global disorder is the depreciation of the exchange rate. A weaker rupee changes relative prices, which helps the economy.

Weaker rupee increases the cost of imported goods. Due to higher prices, people in India will reduce imports, adjust their consumption patterns, and buy more from domestic companies, thereby strengthening domestic demand.

On the external front, a weaker rupee makes Indian exports more competitive, encouraging foreign buyers to purchase more from India.

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