Rupee Falls Past 90/$: India's Top Economist Breaks Silence on Inflation & Export Risks

India's Chief Economic Adviser, V. Anantha Nageswaran, has indicated that the government is not overly concerned about the Indian Rupee falling below the significant ₹90 mark against the US dollar. He stated that the currency's weakness has not yet led to higher inflation or negatively affected the country's export competitiveness.

Global Economic Headwinds

• Nageswaran advised viewing the rupee's performance in the context of global economic conditions.
• These include rising interest rates in the United States, ongoing geopolitical tensions, and tighter financial conditions worldwide.
• He pointed out that the rupee has shown remarkable stability when compared to many other emerging market currencies over the past two to three years.
• The government anticipates an improvement in economic conditions by 2026.

Factors Pressuring the Rupee

• The Indian Rupee has depreciated by approximately 5% this year, reaching an intra-day low of ₹90.30.
• Key pressures include outflows of funds by foreign investors and consistent demand for dollars from domestic banks.
• Analysts also cite the lack of progress on a trade package between India and the United States, along with weakness in equity markets, as contributing factors.

Shifting Investment Landscape

• Nageswaran linked the rupee's recent volatility to changes in global capital flows.
• He noted a structural shift in Foreign Direct Investment (FDI) patterns, with Indian companies increasing their outbound investments.
• This rise in outbound FDI is driven by strategies such as supply-chain localization and geographical diversification by Indian businesses.
• Gross FDI is projected to exceed $100 billion this year, but the environment for attracting it has become more challenging, requiring India to enhance its efforts.
• While existing tax and regulatory issues persist, they do not fully explain the increased challenges in attracting FDI over the past two years.

Strengthening the Investment Climate

• The Chief Economic Adviser stressed the importance of a coordinated, whole-of-government approach to bolster India's investment appeal.
• Providing confidence to both foreign and domestic investors regarding straightforward exit mechanisms is crucial.
• Addressing legal, regulatory, tax, and single-window clearance issues remains a priority to facilitate investment.

Impact

• The rupee's depreciation can increase the cost of imports, potentially leading to higher inflation if not managed effectively.
• Conversely, a weaker rupee can make Indian exports cheaper and more competitive in international markets.
• Significant currency volatility can deter foreign investment due to increased exchange rate risk.
• The government's focus on improving the investment climate aims to mitigate these risks and attract sustained capital inflows.
• Impact Rating: 7/10

Difficult Terms Explained

• Depreciation: A decrease in the value of a currency relative to another currency.
• Emerging-market currencies: Currencies of developing economies that are experiencing rapid growth but are not yet fully developed.
• Foreign investor outflows: When foreign investors sell their Indian assets and take their money out of the country.
• Foreign Direct Investment (FDI): An investment made by a company or individual in one country into business interests located in another country.
• Outbound investments: Investments made by companies or individuals from one country into businesses or assets located in other countries.
• Supply-chain localisation: The practice of establishing or moving parts of a company's supply chain within its home country or a specific region for greater control and resilience.
• Net FDI: The difference between the FDI coming into a country and the FDI going out of that country.
• Single-window issues: Refers to administrative or regulatory hurdles that require multiple approvals from different government departments, ideally streamlined into one 'single window' for efficiency.