Last Updated on Aug 16, 2022 by Aradhana Gotur
This article is written by Divam Sharma, founder and CEO of Green Portfolio and a former analyst at CitiBank, IMGC, and Kotak Mahindra Bank. Check out Green Portfolio’s smallcases.
Finance Minister Nirmala Sitharaman cleared the air on Rupee depreciation in Lok Sabha a few weeks back. Naming a few responsible factors, such as the Russia-Ukraine war, skyrocketing inflation, soaring crude oil prices, and tightening of global monetary policies, she said that the Indian National Rupee (INR) is still performing better than most other currencies that are pegged against the dollar.
In 1947, Rupee was pegged against the dollar at Rs. 1 = $1. But with the increase in imports, current account deficits, and rising inflation, it has now breached the lowest mark. Repercussions of the currency weakness are felt at both macro and micro levels. Although Rupee has been slumping since the beginning of this year, it has come out as a shining star amongst currencies like the Japanese yen, British Pound, and Euro.
Every cloud has a silver lining
Depreciating INR presents itself with an opportunity to increase exports to domestic manufacturers. Despite all this, here are the top five ways the Indian Rupee is making its mark on the world.
- India’s resilience vis-a-vis the world economy
History has proved that India’s resilience towards macro factors like inflation and GDP growth rates is better than other top nations. Thanks to a boost in manufacturing activity and stabilisation in commodity prices, India has proved itself resilient this time too. The IMF released the growth predictions of various economics for FY 2023. Interestingly, India’s growth seems to be the most optimistic. The expected growth rate for India is 7.4%, whereas for China and UK, it is 3.7% and 3.3%, respectively.
- RBI’s strategy to move away from USD
RBI, in its strategic movement against the USD, has given thumbs up to international trades in INR. The move is seen to benefit trading primarily with Russia. This is because, after Russia’s invasion of Ukraine, the former is off the SWIFT payment system. Though it is highly unlikely it’ll be extended to other countries, this move gives hopes for further protection from exchange rate fluctuations.
- Ties with nations
India’s trade relations with countries like the USA, UK, UAE, Australia, etc., are splendid. Ongoing Foreign Trade Agreements (FTAs) are a cherry on the top. More and more investments have been pouring into the Indian economy through Foreign Direct Investment (FDI) routes. Gross Foreign Direct Investment (FDI) inflows increased from $82 bn. in FY 2021 to $83.6 bn. in FY 2022. The time isn’t far away when India will cross $100 bn. FDI, making it globally competitive and best suited for doing business.
- Domination of INR in emerging markets
Strategies like China plus one are making big corporations contemplate their business diversification to emerging markets like Vietnam, Bangladesh, Mexico, and Thailand. However, India remains the top choice for trade as it is better placed than most of the emerging markets.
- Ease of NRI flows in the country
India’s inward remittances have proven “to be a resilient source of current account receipts during the pandemic”, RBI highlighted a few days back. A sudden surge in NRI deposits was seen during COVID when Indians overseas started transferring their funds before returning to their home country. But soon, these started plunging as the situation eased off with time. In a bid to trigger deposits, RBI has removed the interest cap on foreign currency deposits. With the depreciating rupee, India’s sector remains a perfect option for NRIs to invest in.
Threats of recession are the talk of the town lately. Policymakers must strike the right chord to balance amidst high amounts of debt and inflation. As the world is heading to brace economic slowdown, India still stands strong. INR might depreciate further, but with the government’s constant steps to enhance trade and reduce CAD, India has a good chance to come out of this pothole.
Apart from this, we all can agree that the US dollar always acts as a safe haven during such times. When world leaders like the USA are expected to account for the economic slowdown, countries like India stand a chance to overthrow these powers and become global leaders. As the countries release their inflation data, it is getting interesting every day to see who will win the economic race.
After all, India aims to be a $5 tn. economy, and it surely will, given the people, the economic policies, and the government are in alignment.
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