Budget 2022 is almost here and managing the fiscal balance is one of the core challenges that the Indian government and its finance minister will have to deal with. And the rupee’s performance against the US dollar is a key cog in this wheel of fiscal balance.
Why is that, you ask? The reason is simple – a bulk of India’s foreign trade and debt is US dollar-denominated. This means that India has to pay in dollars whenever it imports goods and services into the country. Likewise, it also has to repay foreign debt and interest on it in dollars.
With the Budget 2022 imminent, experts remain cautious and suggest that the rupee will further weaken against the US dollar this year.
“A big [market] crash does not seem likely. The big crashes happen when the returns are far higher than the trend line. And that does not seem to be the case right now. Rupee depreciation is a risk,” Devina Mehra, founder of First Global, told Business Insider.
However, rupee depreciation is not really a bad thing, per se, explains Nilesh Shah, the managing director of Kotak Mahindra Asset Management Company.
“My recommendation is that instead of predicting where the rupee will go, let the market take its call. The market will find what is the fair value of the rupee,” Shah told Business Insider.
“2-3% depreciation of rupee every year is necessary to maintain our competitiveness,” he further added, referring to the fact that rupee depreciation helps make Indian exports attractive.
A weaker rupee against the US dollar – is it a good thing?
This is a simple concept and here’s how it benefits exporters:
If you exported goods or services worth $1,000, at an exchange rate of ₹70 a dollar, you would be entitled to ₹70,000 in total.
Now, if the rupee weakens against the dollar and falls to ₹74 a dollar, you will be entitled to receipts of ₹74,000. That is a gain of ₹4,000 purely on account of the exchange rate change.
However, this becomes a disadvantage when we import goods and services since payments are mostly made in US dollars. In December 2021, India’s trade deficit stood at $21.7 billion, meaning that we imported $21.7 billion worth of goods and services more than exports.