DEPRECIATING CURRENCIES

 Exchange rate refers to the price of  a country's currency in relation to another country's currency.  In other words it is the external purchasing power of the currency.For instance for Indian rupee in terms of other currencies like the US dollar or  European Euro or Japanese Yen.Under normal circumstances the exchange rate is determined by the forces of demand for and availability or supply of a particular currencies used for trade,  investments and other financial transactions.But since the Russian Ukraine war started and sanctions were imposed by  USA and western countries, along with other currencies like Russian rouble,Turkish Lira value of our currency has also depreciated. Russia is the world's third largest exporter of oil and gas and second largest exporter of crude oil after Saudi Arabia. Russia also supplies 38% of natural gas to Europe. Russian supplies were crucial to Europe especially in the context of OPEC'S unwillingness to step up production,which in turn trigger shortages and energy price inflation. It has become all the more important for  India to have an alternative transaction mechanism with Russia to counter measures adopted by USA,European union, and UK like blocking at least  7 Russian banks  from SWIFT (Society  for Worldwide Interbank Financial Telecommunications) a global secure Interbank system that communicate payment instructions and enables transactions between banks from all  countries. 

Since transactions with Russia  cannot be done due to sanctions in international currencies like $ or € a rupee payment mechanism could play a vital role in deciding whether our exporters will get their payment and trading can be continued with Russia. But high voltatility of rouble could make it difficult to implement rupee rouble payment mechanism. Currently there is sanctions against the use of SWIFT. India can trade with Russia using alternatives including barter system or rupee rouble payment mechanism. However if sanctions turn product specific it will be difficult for India to use the arrangement. The economic impact of Eastern European conflict threatens global growth and surge global inflation. Expansive financial sanctions imposed on Russia has impinged the value of rouble to plunge more than 60% against  US$. Prices  of several commodities like wheat, corn, metals,nickel, aluminum and most crucially crude oil and gas kept soaring.As a counter measure recently Russia has banned export of over 200 items including telecom, medical, auto, wheat, corn, barley etc. Sanctions against Central Bank of Russia Federation severely restrict its access to international reserves to support its currency and financial system . Sanctions on Russian banking system and  the exclusion of a number of banks from SWIFT have largely disrupted Russian ability to receive payments for exports and engage in cross border financial transaction. Impact of sanctions have already visible in sharp decline in Asset prices as well as huge depreciation of rouble. 

Indian rupee dipped to 76.97 per dollar on 7th March. Foreign  portfolio investors continue to withdraw from the Indian stock market. Oil  marketing companies are buying dollars for their imports. Hence there is a lot of demand for $ .However $ supplies are limited as very few exporters sold dollar at 76.97 expecting that rupee will go beyond 77 in the coming days. After Russian rouble, Turkish Lira Indian rupee has been among the poor performing currencies in the emerging markets. Reserve Bank of India has been infusing dollar liquidity to buttress depreciating rupee.Fortunately at present India is richly endowed with$633 billion foreign exchange reserves compared to$577 billion in March 31st 2021 which provides a cushioning effect in the external sector despite increasing current account deficit and high  volatility in foreign portfolio investment and  depreciating rupee. Rupee depreciated almost 3.5% against US dollar this year and further 3.2% since Russian military operation on February 24th.Exporters of handicrafts and engineering goods gained marginally from currency depreciation. Whereas import intensive sectors sectors like chemicals and jewelleries which have 90% import dependence became expensive. High crude oil price and a weak rupee will swell the import bill further adversely impacting current account deficit projected to be in the range of 2.5-3.5 % GDP and inflationary pressures. However certain positive suggestions are put forward by experts.1. An organization or cartel of all oil importing countries so that they can come together to plan out strategies jointly . 2. Country can tap Free  Trade Agreement with  UAE to raise oil imports thereby fill the supply gap to some extent.Currently UAE is the third largest supplier of crude oil to India after Saudi Arabia and Iraq.

Despite the moderate depreciation of Indian rupee India is in a relatively stronger position to face the fall out of global liquidity tightening disruptions due to Russian aggression of Ukraine and rising crude and commodity prices, compared with 2013.According to many stable Foreign Direct investment (FDI) alone can fund Current account deficit (CAD).In addition to that our merchandise exports is set to cross $400 billion this year and service exports excluding travel tourism and hospitality are slated to reach nearly $250 billion. Already we are having record $633 billion Foreign exchange reserves. In these circumstances even if import demand is very strong on the back of a recovering economy and crude prices are above $100 per barrel CAD is expected to remain  below 3 percent of GDP .