If the rupee keeps falling against the dollar  the country's economy would be hit badly

The rupee has breached the psychological 80-level mark against the US dollar and is now hovering around it for a couple of days. This is indeed bad news for numerous importers and of course, the country whose trade deficit swells to a new high. Though it would be wrong to assume that it is the end of the road for the Indian economy and we are headed for a Sri Lanka-like situation. Nevertheless, it is ominous as it means that something needs to be done to stop the further slide of the rupee against the dollar as it is the US from where we import a lot of goods that are essential for Indian businesses.

The reason for the depreciation of the rupee against the dollar is varied, some manageable others not.  A big factor is indeed the Ukraine war which has obstructed the supply lines. It has been a steady decline in the Indian currency since February when the Ukraine war began.

The rising dollar is bad news for the Indian economy as the current account deficit increases. The slide in the rupee would put an extra burden on the current account deficit (CAD). India is already struggling with its CAD. It is likely to touch $105 billion or 3 percent of the GDP this fiscal.

Even worse is its impact on inflation which is already racing fast. As the rupee loses its sheen the imports become dearer. This leads to a rise in the prices of raw materials and that reflects in the selling prices. So, we have to pay more for the same goods as the sellers struggle to sustain.

India has to act and act fast to avoid any misgivings about the economic fundamentals of the country.  The Reserve Bank of India (RBI) is taking several measures like selling US dollars in the open markets, out of its forex reserves. This increases the supply of USD in the markets, bringing down their value. But this is a risky proposition as it leads to depreciation of forex reserves. Since February 2022, India's forex reserves have depleted by Rs 1 trillion.

Besides, the rupee settlement mechanism is also being talked about. Under this arrangement, foreign companies can make f payments in rupees. How far this will work is difficult to say as we have a net trade deficit with the USA. Let's hope the Ukraine war ends easing the flow of goods and easing the payment situation.