MAJOR CAUSES FOR THIS PERSISTENT
DECLINE IN THE VALUE OF RUPEE:
1. Strengthening of US dollar due to the decline in monetary policy
of 'quantitative easing' by the US Federal.
2.Significant rise in domestic demand for gold Imports as has led
to depreciation of rupee due to increasing Current account
deficit as India has to pay sell its Forex reserves for gold
3.Fiscal deficit in the Central budget is increasing at an alarming
rate and at present it is at 4.5% of GDP. This deficit is financed
by hot money flows and from FDIs.
4.The recent downgrading of India by international rating agency
has made India less attractive destination for foreign investors.
5.Policy- paralysis prevailing in the country has adversely
affected the sentiments foreign investors and this has led to
flight of dollars from foreign institutional investments (FIIs).
6.Due to economic crisis going in Europe as well as other parts of
world, India's export has contracted significantly and which
has resulted in adverse Balance of Payment conditions.
7.High inflation rate in the economy for quite a long time has
resulted in the fall of nominal value of rupee.
Functions of RBI
• Acts as the Monetary Authority
• It is the regulator and supervisor of the financial system
• Manager of Foreign Exchange
• Issuer of currency
• Developmental role
• Related functions like a)Banker to Govt and b) Banker to banks
Challenges before RBI
• Rupee Appreciation
• Forex Reserves
• Capital Account Convertibility
• Economic Growth v/s Inflation and deflation
STEPS BY RBI
The RBI has increased the Marginal Standing Facility (rate at
which banks borrow from the RBI using their statutory liquidity
ratio securities as collateral) rate. Since, borrowing short term
money will now be costlier, banks will most likely cut their
forward positions and reduce speculative trading. This will reduce
pressure on the rupee.
The RBI has capped the amount banks can borrow from overnight
markets to Rs. 75,000 crore.. These measures are aimed to suck
liquidity from the system. Bond prices will fall and yields will rise.
Higher yields will attract foreign investment back into the debt
since the U.S. FRS signalled a tapering of the quantitative easing.
RBI has responded with timely interventions by selling
Reserve bank has announced that there will be no
changes in the
• current repo rate of 7.25% ,
• reverse repo rate of 6.25%
• cash reserve ratio of 4%.
The government is continuously monitoring the emerging external
sector developments leading to higher CAD and rupee depreciation.
(The government) has taken a slew of initiatives to boost exports
and reduce imports, encourage capital flows to facilitate financing
of CAD and stem the volatility in the exchange rate of the rupee
Proposal to increase Foreign Direct Investment (FDI) cap in sectors
like telecom, retail and defence.
Liberalizing FDI rules will help attract foreign investment into the
country, which is badly needed at a time when the rupee is the worst
performing currency in Asia.
Measures taken by the government to support
the rupee includes
•raising the rate of interest subvention from 2
to 3 % that will benefit exporters and small
and medium enterprises
•hike in import duty on gold
•liberalisation of FDI, etc.
MEASURES THAT SHOULD BE TAKEN BY RBI AND
GOVERNMENT:1. Government should increase the limit of FDI in the
existing sectors as well as encouraging in other
sectors such as aviation, retail, telecommunication,
radio & broadcasting etc.
2. Government should create a stable political and
economic environment in order to make India an
attractive destination for foreign investments.
3. Government should raise import duty on gold in
order to decrease the domestic demand for gold
4. Government and both RBI should take measures to
bring down high inflation rates.
1. Government should steps boost export-intensive sectors and
develop import-substituting industries in order to make India
less dependent on imports.
2. RBI should sell Forex reserves and buy rupees in an
immediate action in order to arrest the further decline in the
value of rupees.
3. RBI should hike the interest rates in order to reduce the
money supply in the economy.
•To attract investments, RBI can ease capital controls
by increasing the FII limit on investment in government
and corporate debt instruments
•Government can create a stable political and economic
•However, a lot depends on the Global economic
outlook and the future of Eurozone which will
determine the future of INR.
•All said and done but it may be argued that if policy
makers attempt to arrest the further depreciation of
rupees, then the over-all economic growth will take a
•Hence, we can say that the policy makers are facing a
real challenge of arresting the fall in the value of rupee
as well as reviving the already slow economic growth.
• The future of the Indian economy now depends on
how our policy makers deal with the current global