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Economic Turbulence and Rupee Decline
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Context
The recent economic turmoil caused an extraordinary decrease in the value of the Indian rupee, raising fears among investors and authorities.
Domestic Factors:
- Inflationary Pressures and Commodity Prices: Rising inflation and commodity prices have eroded the purchasing power of the rupee.
- Fiscal Deficits and Policy Stance: Concerns over fiscal deficits and government policy stance have undermined investor confidence.
- Supply Chain Disruptions: Disruptions in the supply chain have exacerbated economic challenges, impacting the rupee's value.
International Factors:
- Global COVID-19 Pandemic Impact: The resurgence of the pandemic globally led to lockdowns and reduced demand for Indian exports.
- Trade Restrictions: Global trade restrictions affected India's external trade balance and currency reserves.
- Economic Activity and Reserves: Reduced economic activity globally added pressure on the rupee's value and currency reserves.
Response and Urgency for Structural Reforms:
- Reserve Bank of India's Intervention: The RBI intervened to stabilize the currency but faces challenges.
- Persisting Downward Trajectory: Despite efforts, the rupee's downward trajectory continues, highlighting the need for reforms.
- Need for Structural Reforms: Policymakers emphasize the urgency of structural reforms to boost productivity and restore investor confidence.
UPSC Mains Question:
Q. Discuss the domestic and international factors contributing to the recent depreciation of the Indian rupee. What measures should policymakers take to address the structural issues and restore confidence in India's economic prospects?
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