Falling Indian Rupees
Kartavya Desk Staff
Syllabus: Economics
Source: IT
Context: The Indian rupee is falling continuously against the US dollar, hitting a record low due to US President new tariffs on imports from China, Mexico, and Canada.
What is Exchange Rate?
• The exchange rate is the value of one currency in terms of another, determining how much domestic currency is needed to buy one unit of foreign currency.
• Exchange rates fluctuate based on demand and supply in the currency market, influenced by trade, investments, and monetary policies.
How Does Exchange Rate Work?
• Demand-Supply Dynamics: If demand for the US dollar rises more than the rupee, the dollar strengthens, and the rupee weakens.
• Trade and Investments: Higher US imports, foreign investments, and capital outflows reduce rupee demand, depreciating its value.
• Inflation & Interest Rates: Higher inflation or lower interest rates in India reduce investor confidence, leading to rupee depreciation.
Factors Leading to Fall of Rupee:
• Trade Imbalances & Tariffs:
• US tariffs on China, Mexico, and Canada have strengthened the US dollar, weakening emerging market currencies, including the rupee. India’s higher imports vs. exports increase demand for US dollars, depreciating the rupee.
• US tariffs on China, Mexico, and Canada have strengthened the US dollar, weakening emerging market currencies, including the rupee.
• India’s higher imports vs. exports increase demand for US dollars, depreciating the rupee.
• Strengthening US Dollar & Fed Policy:
• The US Federal Reserve’s tight monetary policy has led to higher bond yields, attracting global investors to US assets. The dollar index rose to 109.8, strengthening the US dollar against major global currencies.
• The US Federal Reserve’s tight monetary policy has led to higher bond yields, attracting global investors to US assets.
• The dollar index rose to 109.8, strengthening the US dollar against major global currencies.
• Foreign Institutional Investment (FII) Outflows:
• Global investors are pulling out funds from Indian equity markets, leading to higher dollar demand. The fear of a trade war and global economic slowdown has triggered capital outflows.
• Global investors are pulling out funds from Indian equity markets, leading to higher dollar demand.
• The fear of a trade war and global economic slowdown has triggered capital outflows.
• Inflation & Interest Rate Differential:
• Higher inflation in India compared to the US reduces purchasing power, making the rupee less attractive. Lower interest rates in India discourage foreign investments, further weakening the rupee.
• Higher inflation in India compared to the US reduces purchasing power, making the rupee less attractive.
• Lower interest rates in India discourage foreign investments, further weakening the rupee.
Impact of Falling Rupee on Indian Economy
• Negative Impacts
• Higher Import Costs: India imports 80% of its crude oil, making fuel, raw materials, and essential goods more expensive. Inflation Surge: Costlier imports increase input costs, leading to higher inflation and reduced purchasing power. Widening Current Account Deficit (CAD): Rising trade deficit and costlier dollar-denominated imports worsen India’s CAD, pressuring forex reserves. FII Outflows: A weak rupee reduces investor confidence, leading to stock market declines and capital flight.
• Higher Import Costs: India imports 80% of its crude oil, making fuel, raw materials, and essential goods more expensive.
• Inflation Surge: Costlier imports increase input costs, leading to higher inflation and reduced purchasing power.
• Widening Current Account Deficit (CAD): Rising trade deficit and costlier dollar-denominated imports worsen India’s CAD, pressuring forex reserves.
• FII Outflows: A weak rupee reduces investor confidence, leading to stock market declines and capital flight.
• Positive Impacts:
• Stronger Export Competitiveness: A weaker rupee makes Indian exports cheaper, boosting IT, pharma, and textile exports. Higher Remittances: NRIs sending money to India benefit from better exchange rates, increasing remittance inflows.
• Stronger Export Competitiveness: A weaker rupee makes Indian exports cheaper, boosting IT, pharma, and textile exports.
• Higher Remittances: NRIs sending money to India benefit from better exchange rates, increasing remittance inflows.
Way Ahead:
• Enhancing Export Competitiveness: Strengthen Make in India and promote value-added exports to reduce trade imbalances.
• Managing Inflation & Interest Rates: Ensure monetary policies align with inflation control while maintaining growth momentum.
• Boosting Forex Reserves: Encourage higher FDI inflows and reduce non-essential imports to stabilize the rupee.
• Diversifying Trade & Reducing Oil Dependence: Invest in renewable energy and explore alternative trade partners to reduce reliance on crude oil and dollar transactions.
• Improving Investor Confidence: Strengthen India’s macroeconomic fundamentals, ensuring policy stability to attract long-term foreign investments.
Conclusion:
The rupee’s decline reflects global economic volatility, trade war fears, and strong US dollar dynamics. While higher exports and remittances provide some relief, rising inflation and CAD remain concerns. India must focus on macroeconomic stability, trade diversification, and policy interventions to sustain economic growth amid currency fluctuations.
Insta Links:
• Real-effective-exchange-rate-REER
• How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India? (UPSC-2018)