Topic – Indian economy : issues
5) Besides the economic management, the politics of a weaker rupee will also need careful handling. Analyze. (250 words)
Why this question
The sharp decline seen in INR has been in the news headlines off late. The reasons behind the decline, and the impacts of it need to be prepared in depth. This article discusses the reasons why rupee has declined so much in value as well as the future course of action.
Key demand of the question
The question expects us to explain the reasons why rupee has seen a sharp decline in value. Next, we need to focus on the what needs to be done next and how to ensure that political and economic issues are simultaneously handled. We need to conclude with a way forward.
Analyze – When asked to analyze, you have to examine methodically the structure or nature of the topic by separating it into component parts and present them as a whole in a summary.
Structure of the answer
Introduction – Paint the current picture with respect to status of rupee vis a vis USD and currencies of other peer economies.
- Explain the reasons behind fall in value of rupee – widening CAD, wider emerging market sell-off which is also affecting capital flows, Higher interest rates in the US which will affect capital flows to emerging market economies and make things difficult for countries with higher CAD, the geopolitical factors due to which oil import bills have been increasing etc
- Give your view on the falling value of INR – whether it is merely rupee reaching its true value in line with REER, or whether the fall in currency’s value is alarming and needs urgent redressal
- Highlight the economic responses that would be apt for the course in this case – adjustments in interest rate in the short term and taking steps to control CAD in the long term
- Highlight that the political response to this issues is likely to ignore all these factors focussing primarily on the ensuing inflation due to fall in value of rupee. Explain that knee jerk reaction to the crisis should be avoided
Conclusion – Give your view on the status of rupee and the way forward.