Decline of Indian Rupee

Why is Indian Rupee Falling Against US Dollar

The reasons why Indian Rupee Falling Against US Dollar

Trade deficit: Increasing trade deficit directly affects rupee value. As import value is higher than exports, there will be outflow of dollars, thus weakening the rupee.

Outflow of capital: Capital outflow from Indian market involves conversion of rupee into dollars. This will strengthen dollars vis-a-vis rupee.

Rise in crude oil: As crude oil prices rise; the government has to pay more dollars to buy. This will increase the demand for dollars.

Strong dollar: A strong dollar is directly linked to a weak rupee. As dollar demand increases, the value of rupee falls.

Read about: Decline in Exports in India

Indian Rupee Falling Reasons

• On January 1, a dollar was Rs 74.50. It has now climbed to more than Rs 82.30.
• The dollars has strengthened against nearly every currency around the world.
• Other currencies:
  • Euro: The Euro is 1.02 against the dollar from 0.88 at the start of the year.
  • British Pound: The pound is 0.89 against the dollar
  • Japanese Yen: The Yen has moved from 115 to 148 against the dollar.
  • Australian dollar: The Australian dollar has gone from 1.37 to 1.61.

• Status of Indian rupee:
  • Comparatively stronger: Despite Rupee falling to all time low, it has been among the more stable currencies in the current environment.
  • The rupee has lost 2.6% against the dollar in September 2022. This number is comparable to the decline in the euro, which lost 2.4% in September.

What are the Implications of Indian Rupee Falling

• Advantages:
  • Boost exports: The weakening of the rupee makes some exports more viable as a result of competitive price. However, input raw materials become costlier.
  • Discourage imports: The higher price of imported goods will discourage imports, which in turn helps with reducing the buildup of external debt.
• Disadvantages:
  • Inflation: Indian economy is heavily dependent on imports for commodities such as oil and gold. Since prices are determined in US dollars, the country will be forced to pay more rupees to secure the product.
  • Increase in fuel prices is expected to increase inflation in the country. A 10 percent dollar appreciation will lead to 1 percent rise in inflation.
  • Debt payments: The servicing of sovereign debts will be more costly as the value of dollars has increased. The government and private players have to repay more rupees for same amount of dollars.
  • Decline in foreign investments: Foreign investors will reduce investments in the country as their profits will decline as a result of currency depreciation.
  • This will impact long term growth in emerging economies such as India.

Indian Rupee Falling Reasons for Strengthening of Dollar

• Better performance of US economy: At fundamental levels, the US economy is performing better than other economies.
  • Despite high inflation, the US job market is doing very well, especially the service sector. This has increased confidence in the market.
• Rise in interest rates: The US Fed is raising is interest rates. This has attracted investors to invest in US government bonds, which are considered one of the most secure investment options.
  • The current status of inflation in US is expected to force US Fed to raise its interest rates further. This will lead to further decline of global currencies, including Indian rupee.
• Safe asset: Many investors believe that dollar is the safest asset to hold when stock and bond markets turn volatile. This has increased demand for dollars, thus increasing its value.
• Recession in EU market: EU markets are witnessing a recession due to the Russia-Ukraine war. Investors are leaving EU markets and investing in US dollar-dominated assets.

What can be done to Stand Strong Against Strong Dollar?

• Diversifying currency: Over-dependency on US dollars for international transactions needs to stop. This will reduce impact of volatile US dollars on emerging economies.
• Foreign exchange intervention: Many countries are indulging in foreign exchange intervention to prevent further slide in their domestic currency.
• This includes selling dollars and buying their own currencies to strengthen its position.
• Currency resilience: Emerging countries must stockpile dollar reserves, which will act as buffer against external currency shocks.
• Currency swap: Developed countries could activate currency swap lines to eligible countries. This will act as an important safety valve in times of currency market stress.

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