InvestorQ : There was a news item in the papers that the rupee is weakening because the government could announce higher fiscal deficit. How is that important to the rupee?
Mahil Khan made post

There was a news item in the papers that the rupee is weakening because the government could announce higher fiscal deficit. How is that important to the rupee?

Answer
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Jignesh Gupta answered.
2 years ago


The INR has been seeing strength each time the government has committed itself to maintaining fiscal discipline. When expenditures are unchecked, the impact is immediately evident the fiscal deficit and the revenue deficit. In fact, back in mid-2013 the revenue deficit of India had almost gone as high as 5% which eventually led to the INR cracking sharply versus the dollar. Any deterioration in these key macros will automatically lead to pressure on the INR. The government is regulated by a Fiscal Responsibility Management Act which sets yearly limits on the total fiscal deficit as a percentage of GDP. Any laxity in this target leads to higher inflation and greater vulnerability of the Indian rupee.

There is one more point that needs to be understood. Most central banks tend to direct the currency towards a specific target. Of course, the role of the central banks in regulating currency movements is quite limited. Still countries like Russia, China, India and Singapore have seen substantial impact of central bank action on the currency value; INR included.