In the past couple of weeks, one piece of news that is much debated in the Indian media other than Smt. Draupadi Murmu's election to the seat of President of India & the fall of the Sri Lankan economy is the rapid decline of the value of the Indian Rupee. The Rupee is falling quite aggressively compared to the USD. Will it fall more? What does it mean for an ordinary Indian? Let's learn all in this article.
The current situation in Sri Lanka is horrible with the collapse of the economy and the Government. People are out on the streets protesting and demanding a better environment. One thing that is common between India and Sri Lanka right now is the depreciation of the currencies of both countries against the US Dollar. Since 2000, the Sri Lankan Rupee is consistently depreciating till its economy blew up in 2022. The same can be said for India. The Indian Rupee which was trading at roughly ₹43 for 1 USD is now trading at an all-time low of ₹79 for 1 USD. So, is the Indian economy going to meet the Sri Lankan fate?
As per the data of the Reserve Bank of India, India currently has approximately 10 months of working capital left. This means that whatever money India requires to meet its requirements, pay its employees, and import from other countries in the next 10 months is available in its foreign reserves. But one thing that worries the RBI is the fact that the future of the world is very unpredictable with the ongoing Russia-Ukraine war and the rising levels of global inflation. But if things are to go worse in the global picture, an emerging economy like India is surely going to take a hit resulting in the depletion of our foreign reserves sooner than we expect.
To stabilize the falling Rupee, the RBI has opted for a Rupee Settlement System. The price of the Rupee depends on the demand and supply. In the current times, the demand for INR is quite low compared to its supply. So, RBI is trying to increase the demand for INR by slowing down its supply. To achieve this increase in demands, they have suggested that all the trade that India does with the other countries be done using the Indian Rupee.
Currently, if we buy oil from Russia, we pay them using the US Dollars i.e. the preferred currency for global trades, thus increasing the demand for USD which reflects poorly on the INR. Hence, the Rupee Settlement System seems to be a simple solution to catch the falling Rupee and reduce India and other countries' dependence on the US. If this system is adopted at a global level, it does have the potential to be a game changer for many emerging economies and for India as well. It also does have the potential to increase India's forex reserve.
Though this system sounds too good, in practice, it seems difficult to replace the current global trade practices in the short term. India needs to convince its trading partners to accept this system and it seems highly unlikely that India's big trading partners like UAE, Switzerland, Germany, South Korea, Australia, and Japan to come aboard and accept the Rupee Settlement System owing to their close proximity to the United States.
Saying so, it's a good step and might benefit India in the longer run. Until the Rupee stabilizes in the near future, prices of fuel are set to go up which will result in higher transportation costs and this, in turn, will cause the cost of manufacturing many daily commodities to go up. Many businesses which import their raw materials from foreign countries will also likely bear the burn of the falling Rupee.
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