Rupee depreciation and current account deficit

Dear Mentor, 1) Could you please clarify about the relationship between rupee depreciation and current account deficit ? How the rupee depreciation will broaden the current account deficit ?

2) How the rupee deprecation will cause the inflation ?"

Pls come up with points for the relationship between depreciation and CAD...

Depreciation->Imports Expensive->Oil imports turn the Current Account deficit wider

So, does depreciation always hurt?? If so, why can't we follow a policy of fixing our INR@ 1rupee=1$..

No, assuming itnernational competition to be constant- depreciation also makes our Exports cheaper,it will increase the price of our oil imports, which are inelastic...

What's an inelastic good?

Whose demand doesn't decrease in proportion to increase in price. A good which has a very low price sensitivity is said to be inelastic..

Name some inelastic goods. Y are they inelastic??

Because they're essential and substitutes are not easily available Eg- Crude Oil, Tobacco. Gold is also getting inelastic.

So, depreciation---> imports become costly, bcoz of huge share of inelastic goods In our import basket----> current account deficit increases. What's the connect with inflation??

Oil price increase - transport charge increase - product price increase , sir

Besides being inelastic commodities, sir, they're also essential for the economy. hence, if their prices rise- so will the supply side inflation

Moreover, depreciation will increase the interest to be paid on ECBs taken by the Indian companies from abroad.. So, in the long run, they will pass on this increase in cost to the Indian consumer.. This also may cause inflation

although the magnitude of ECBs in India is not so much sir. Is that why partly we were shielded from the extremely adverse contagion effect of 2008 crisis?

Ya! ECB is strongly regulated by our central bank(RBI). Companies are not allowed to get External Commercial Borrowings more than a certain portion of their forex earnings. That's why India is said to have a not-so- convertible capital account (ECB is a component in our capital account)...

Sir , if companies pay more money due to depreciation means , then they will cut the spendings and no hike , no bonus to the employees .. So employees will not have money .. So demand will decrease on the product .. So price of product will decrease .. So how this will increase inflation in long run , sir . Could you pls help me to connect it , sir ?

Labour market is a different issue. You can't just fire workers in an incorporated company. There are legal obligations.. Moreover, you companies don't have excess Labour. They can't reduce it beyond an optimal level. So the natural reaction is to increase the price of the goods they produce