Indian Ruppee Crisis

INDIAN RUPEE CRISIS 

India’s Balance of Payments since 1970-71, it is seen that external account mostly balances in 1970s. in the second half of 1970s there was a current account surplus,this was a import substitution strategy. In 1980s, current account deficits start into a BOP crisis in 1991. It was in the 1991 Union Budget where Indian Rupee was devalued and the government also opened up the FDI. India Flexible rate system was on the fixed rate, when it was switched to floating rate model. Fixed Flexible rate is the rate fixed by the central bank against major world currencies like US dollar, Euro etc. Floating Flexible rate is the rate determined by market forces based on demand and supply of a currency. If supply is greater than the demand of a currency its value falls, as is happening in the case of the US dollar against the rupee, as there is huge inflow of foreign capital into India in US dollar.

The current scenario flow of foreign capital to reduce when compare with last two decades. Lacking of inefficient market condition, highly dominating budget against the small traders, Balance of Payment face the falling trend, high investment in gold and decreasing the revenue collection of existing foreign investors. These are all the factors to support decreasing rupee value against the dollar.

Tapering in QE was attributing this strong inflationary force in India, threatening to BOP crisis. It was also argued that inflation was due to supply constraints.

Tapering of QE announced in 2013 caused a depreciation that is decrease in the value of the Rupee because it led to weakening the dollar against the rupee because of the increased demand. This money was invested in India in the form of foreign direct investment or through foreign institutional investors. This had a huge impact in India, making it crash along with the bond market. 

Weak BOP affected India in regards to inflation and its Rupee exchange rate by losing exchange reserves. There can also be a reduction in foreign investment. The deficits will continue to depreciate the rupee and lead to a higher inflation and weaker exchange rate.