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Why is the Indian currency weakening? Discuss the factors contributing to it while suggesting measures to overcome it.

Topic:  Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

5. Why is the Indian currency weakening? Discuss the factors contributing to it while suggesting measures to overcome it. (250 words)

Reference: The Hindu

Why this question:

The Indian rupee fell sharply against the U.S. dollar to a record closing low of 75.20 as deepening concerns about the economic fallout of the COVID-19 pandemic sent global investors hurrying to dump most assets, especially emerging market holdings, and opt for cash and the relative safety of the greenback. Thus the question.

Key demand of the question:

The answer must explain the reasons for the currency weakening in the country and factors responsible for it.

Directive:

Discuss – This is an all-encompassing directive – you have to debate on paper by going through the details of the issues concerned by examining each one of them. You have to give reasons for both for and against arguments.

Structure of the answer:

Introduction:

Briefly explain that as it happened in 2008 during the Global Financial Crisis (GFC), the widespread economic uncertainty triggered by the latest COVID-19 outbreak has forced most investors and businesses across the world to seek to conserve that most crucial asset during times of crisis: cash and more specifically the U.S. dollar.

Body:

List down the contributing factors one by one.

Explain the effect of COVID-19; The depreciation is even more worrisome as the month of March is typically good for the Indian rupee as remittances, from both individuals and companies tend to buoy the exchange rate.

The yellow metal too has been sold by investors looking to hold the most liquid and most fungible of all assets — the U.S. dollar.

Discuss the possible balancing factors available.

Conclusion:

Conclude that the outlook on the rupee will be precarious for the next few days. If there’s meaningful coordinated action from global central banks and governments, some calm could return to the markets.