Rupees Depreciation Against Dollar

On 12th September, the rupee went down again at 72.15 to dollar. Since beginning of the year 2018 to till date rupee has fallen 7.5% and this is considered as Asia’s worst currency performance.

Over the past few months, the depreciating value of Indian currency in relation to US dollar has been center point of Indian Economy.

Why rupee is falling?

• US monetary policy is backed by US Federal Reserve because of which American debt is decreasing and yield keeps on increasing. So Indians are investing more in US just because they’re getting higher return.

For example, Foreign investors of India are withdrawing approx. 29,714 crore rupee from India and investing in some other countries. https://www.thehindubusinessline.com/markets/fpi-outflows-hit-10-yr-high-at-rs-48000-cr-in-first-half-of-2018/article24303898.ece

• Prices of Oil continuously rises, if any country wants to trade in international market, medium of exchange is in Dollar. Right now India is importing Oil from foreign countries and just because of this we need to purchase dollar for an exchange. i.e. more pressure put on rupee.
• Indian rupee has fallen to 7.5% and on opposite side, Dollar increased 6.5%. This shows increasing importance of the dollar.
• Trade deficit — India is an importer, and the more we import the greater is our trade deficit, and the weaker is our rupee.

• US -China trade war; US has increased import duty on many countries like, India and the European Union.
• India’s Current account deficit (CAD) has increased. Higher oil prices are raising India’s CAD and outflow of currency due to the fear of value erosion is leading to further economic deterioration.

The way forward!

• RBI intervention -RBI has increased interest rate for first time in last four years. So this might attract investors to invest more which will ultimately increase money supply.
• The Reserve Bank of India (RBI) raised the investment limit for foreign institutional buyers in government debt from $5 billion to $20 billion.
• By trading in Foreign Exchange Market through RBI, India can still make better reserves and stable the rupee fall. Like India have approx $ 420 billion reserve which will lead to them selling some part of reserves to maintain rupee.
• To keep an eye on the rate of interest on investment charged by US Federal Reserve.
• Compressing CAD and introduce deposits for foreign investors.
• India can reduce its current account deficit by increasing the value of its exports relative to the value of imports. It can place restrictions on imports, such as tariffs or quotas, or it can emphasize on policies that promote export, such as import substitution, industrialization or policies that improve domestic companies’ global competitiveness.
• The country can also use monetary policy to improve the domestic currency valuation relative to other currencies through devaluation, which reduces the country’s export costs.
• India can prepare for large scale agricultural export so exporting agro products will increase employment growth and increase circulation of rupee.

“Let’s be clear, the depreciation of Indian rupee against US dollar is not indicative of bad time for the Indian economy. Over past three years, rupee has been overvalued by approximately 17% and the current depreciation of 9.8% since January is move towards its natural value”

– NITI Aayog Vice chairman Rajiv Kumar