Question : What are the causes (mention any 3) and consequences (mention any 3) of the

depreciation of the rupee in August 2013?

Answer : The value of Indian rupee against US dollar fell from Rs.55.48 to Rs. 57.07 in the
month of May, 2013 itself reaching to an all-time low of ₹68.845 on August 28,2013.

Causes of the depreciation

1. Huge capital outflow: There was a net outflow of debt and equity of around US $84
million from Indian markets from June to August 2013. FIIs pulling out capital from
the debt and equity markets along with increasing demand for dollars by the
corporates and oil firms led to the dual effect on the depreciation of rupee
It must be noted that the capital outflow was triggered by the announcement of a
“tapering” of quantitative easing (QE) by the United States Federal Reserve System
since the US economy had shown the signs of recovery from recession as shown by
the decline in unemployment rate. This made the US market much more attractive and
thus capital outflow
2. Widening Current Account Deficit : India is a major exporter of gold and the
tendency to of Indians to invest in gold as a measure to hedge against inflation
increased the demand for gold in the 2013 period adding to the current account deficit
3. Crude Oil Prices : The demand for crude oil in India is majorly met via imports and
is valued in terms of US dollars thus increasing the demand for dollars which causes
the rupee to depreciate

Thus huge deficit on current accounts and overdependence on capital inflows caused the
depreciation of rupee in 2013

Consequences of Depreciation of rupee

1. Effect on the Indian economy; imports and exports and the subsequent effect on
Inflation and economic slowdown: a depreciation in rupee led to an increase in the
income for big exporters ( like IT; Infosys and Wipro , generic drugs; Cipla and Sun
Pharma etc) as well as oncreased earnings for traditional low cost, labour intensive
textiles, leather and handicraft industries as rupee depreciation made Indian goods
cheaper against other countries and thus the exports attractive
But a simultaneous increase in import prices increased the burden of import-input
costs on certain corporates. Since most of these imports are price inelastic, there
wasn’t any reduction in the import quantities sort but an increase in the price
increasing the overall price of imports
This increases both WPI and CPI
2. Labour issues related to wage hikes: The depreciation of rupee led to the economic
slowdown and high inflation. In order to compensate the workers for the same, there
were multiple negotiations with employers demanding wage k=hikes by employees
and the failure of the employer to do so led to closure of certain plants as well, for
example Toyota, Bidadi.
3. Increased cost of servicing foreign debts: foreign debt is sensitive to foreign
exchange rate fluctuations and the cost of servicing the debt (interest payments) and
ultimately borrowing cost increases adversely impacting the performance of
companies having high foreign debt and discouraging any further issue of foreign debt