The Indian currency depreciated more than 20 per cent in 2008 and even breached the crucial 50-level mark against the greenback on sustained dollar purchases by foreign banks and a strong dollar overseas. There were several consequences of the falling Indian rupee with mixed effects on the Indian economy. While exports rose, so too did the costs of imported goods, capital-intensive projects and dollar loans taken by companies, which increased the foreign debt. Overall, economic growth slowed down as interest rates rose and foreign institutional investment flows ebbed. This paper studies the real implications of the depreciation of the rupee on the Indian economy and shows that in the long run, the Indian economy has more to lose and less to gain from a weaker rupee.
