Depreciation of the Indian Currency: Implications for the Indian Economy

The Indian currency has depreciated by more than 20 per cent since April 2008 and breached its crucial 50-level against the greenback on sustained dollar purchases by foreign banks and stronger dollar overseas. The fall in the value of Indian rupee has several consequences which could have mixed effects on Indian economy. But, mainly, there are four expected implications of falling rupee. First, it should boost exports; second, it will lead to higher cost of imported goods and make some of the capital intensive projects more expensive to execute; third, it will increase the cost of dollar loans taken by companies and increase the foreign debt and fourth, it will slow-down the overall economic growth by increasing the interest rate and dissuade flow of FIIs. This paper studies the real implications of the depreciation of the rupee on the Indian economy and shows that in the long run, the Indian economy has more to lose and less to gain with weaker rupee.