Depreciation of the Indian Rupee

Nishtha Sharma

Devaluation or Deprecation?
Devaluation means official(government) lowering of the value of a countrys currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency. Depreciation is used to describe a decrease in a currencys value due to market forces, not government or central bank policy actions.

Devaluation is the result of official government action

Depreciation or decline of exchange of one currency in terms of another is due to market forces

India Rupee per U.S. Dollar Currency Exchange

Factors leading to depreciation

Continued Global uncertainty: Owing to uncertainty prevailing in Europe and slump in international market, investors prefer to stay away from risky investments. Capital Account flows: Deficit countries need capital flows and surplus countries generate capital outflows. India needs dollars to finance its current account deficit. Institutional investors investing in India are directly impacted by the global market uncertainty. Thus the relation becomes a vicious cycle, thereby further magnifying the volatility. Lack of reforms.

 Persistent inflation: India has experienced high inflation, If inflation becomes a prolonged one, it leads to overall worsening of economic prospects and capital outflows and eventual depreciation of the currency. Interest Rate Difference: Higher real interest rates generally attract foreign investment but due to slowdown in growth there is increasing pressure on RBI to decrease the policy rates. Under such conditions foreign investors tend to stay away from investing.

Current Account Deficit: Indian exports more than it imports, thus a depreciating currency makes its imports costlier in the International market.

Impact of the falling rupee on the Indian

economy
Rising import bill. India imports close to 70% of its net fuel requirements. This means the companies importing oil have to shell out more rupees for the same dollar invoices. The falling rupee will lead to the inflation as it may lead to the rise in the prices of the commodities directly or indirectly and that will result in less purchasing power.

The depreciating rupee will add further pressure on the overall domestic inflation and since India is structurally an import intensive country

 The exporters gain from the depreciation of Rupee as they get more of the local currency in exchange of the foreign one. The depreciating value of Rupee is like a boon to Indian IT sectors as it generates more than 80% of their revenue from overseas market and this will enhance their actual realization of revenue.

Emigrants living outside India also benefits from this depreciation.

If Rupee DEPRECIATES

If Rupee APPRECIATES (For example, when US$INR moves from Rs50/- to Rs 47/Imports become cheaper as for each USD we have to pay Rs3 less. IMPORTS BECOME CHEAPER Exporters will earn lower revenue. For exports of each dollar, now the exporter will get Rs 3 less. EXPORTERS EARN LESS

Effect on
Importers

(For example, when US$INR moves from Rs.50/- to Rs55/) Imports become costly as for each USD we have to pay Rs5/more. IMPORTS BECOME COSTLIER Exporters will have higher revenue. For exports of each Dollar, the exporter will get Rs 5 higher. EXPORTERS EARN MORE

Exporters

Indians Who Wish to Go on Holidays Abroad

For each dollar taken abroad for spending, the traveller has to pay Rs 5 more and thus his trip will become costlier. TRIP IS COSTLIER

For each dollar he intends to take abroad for spending, the traveller has to pay Rs3 less and thus his trip will become cheaper. TRIP IS CHEAPER

Steps ahead- what can be done..?

Using Forex Reserves: RBI can sell forex reserves and buy Indian Rupees leading to demand for rupee. Make Investments Attractive -Easing Capital Controls, capital controls could be eased to allow more capital inflows. Measures by Government: Government should take some measures to bring FDI and create a healthy environment for economic growth. Key policy reforms that should be initiated includes rolling of Goods and Services Tax (GST), Direct Tax Code (DTC)

Thank you