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Why Indian Rupee is falling part 2 | 42nd Class | IAS 2019

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Why in NEWS?

The rupee set a new all-time low record today, staying above the psychologically-important 70 mark against the dollar for the second consecutive trading day. The factor that sent it sliding 43 paise to Rs 70.32 in opening trade from the previous close was India’s widening trade deficit.

What role is played by the Widening trade deficit in reducing the value of Indian Rupee?

According to latest data released by the trade ministry, India’s trade deficit hit a 5-year high of $18.02 billion in July, up 8.5 per cent month-on-month. This is mainly because of surging oil imports, which grew by over 57 per cent year-on-year to $12.35 billion. While total imports jumped 28.81 per cent to $43.79 billion, exports only went up by 14.32 per cent to $25.77 billion (year-on-year).

Why the economics theory has gone against Indian Currency?

While the textbooks all claim that the depreciating rupee gives a boost to exports, the numbers tell a different story. According to Mint, India’s currency weakened around 22% per cent against the dollar between 2012 and 2017 and the compound annual growth rate in exports during the same period was a meagre 0.2 per cent. Given the news on the US-China trade war, the outlook for exports is far from bright.

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