Trade War: 2018 Was A Bad Year For The Indian Rupee, 2019 May Be Even Worse

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2018 Was A Bad Year For The Indian Rupee, 2019 May Be Even Worse
2018 Was A Bad Year For The Indian Rupee, 2019 May Be Even Worse

The Indian currency weakened to Rs 73.61 against the US dollar, on October 30. Throughout this month, the Indian currency averaged around Rs 73.62 against US dollar. There is growing fear in the market that it might even cross the Rs 75 mark given the recent trends.

Such performance of the Indian currency has increased several macroeconomic issues thereby affecting the economic growth, increase in education expenses for the Indian students studying abroad and hampering the market ecosystem. Moreover, the rise in dollar rate has further increased India’s import bill for crude oil.

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If this continues in the coming months, then there is a high probability of creating inflationary pressure in the economy. The production cost will increase due to the increased cost of raw materials imported from outside and at the same time. In turn, the consumers will have to bear the burden of this rise. This is the current scenario but what about the future? What will be the dollar price in June 2019 after the Lok Sabha Elections? Let us critically examine this scenario.

Trade War

There is a huge trade tariff war happening between USA and China wherein China is continuously devaluing its currency against the dollar. Market experts believe that this face-off between two big trading nations could negatively impact Asia’s economy, including India. Country’s current account deficit(CAD) is dependent on capital inflows. India is already struggling with its CAD.

Crude Oil

India is the second largest crude oil importing country in the world. The depreciating INR puts the country in a vulnerable position.  While the Centre has stressed that the country will 30% electric vehicles by 2030 and thereby reduce country’s imports bills on crude oil, there several associated challenges with this plan. Costly raw material, need for infrastructure overhaul, bringing together all the stakeholders, among many others.

Current Account Deficit

The current account deficit of the country has increased to around USD 35 billion. This is going to increase further with the rising prices of crude oil. But how does the current account deficit affects the economy? The increase in the current account deficit leads to more demand of dollars to pay for the imports and finance the growing deficit. As a result of this demand, the dollar is appreciating and the INR is depreciating. With such a huge deficit, India is unlikely to tackle it and this deficit will keep on increasing.

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Lok Sabha Elections

Finally, conducting upcoming assembly elections in five states, followed by the 2019 Lok Sabha elections will incur a substantial cost. While the PM has claimed to bring back the black money, it remains to be seen how much that promise is realised. Also, the statistics argue that that on six occasions since 1989 the rupee crashed before elections.

Based on the above discussions, it can be said that the depreciation of INR against the dollar will continue even after the election and may even inch closer to the Rs 80 mark.

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