Notes

in the recent times, the news channel are continously addressing the issue of indian currency depricitaion against the us dollar,

currency depriciation
Currency depreciation is the fall in the value of a currency in the exchange market. So, what do we mean when we say the value of Indian Rupee has depreciated against US dollars, as we are regularly told by the news portals? In layman’s terms, it means now one Dollar can be exchanged for more Rupees than before.

For instance, on May 26th, 2014, you could get 58.66 Rupees in exchange for one Dollar. However, on 5th October 2018 – four years later, you would be entitled to 74.07 Rupees in exchange for one Dollar. That is the depreciation of Rupee and a simultaneous appreciation of Dollar.

Countries with weak economic fundamentals, such as chronic current account deficits and high rates of inflation, generally have depreciating currencies. Currency depreciation, if orderly and gradual, improves a nation’s export competitiveness and may improve its trade deficit over time. But an abrupt and sizable currency depreciation may scare foreign investors who fear the currency may fall further, leading them to pull portfolio investments out of the country. These actions will put further downward pressure on the currency.

Easy monetary policy and high inflation are two of the leading causes of currency depreciation.

history of currency depreciaction
The Indian currency has witnessed a slippery journey since Independence. Many geopolitical and economic developments have affected its movement in the last 75 years.

When India got freedom on August 15, 1947, the value of the rupee was on a par with the American dollar. There were no foreign borrowings on India's balance sheet.
To finance welfare and development activities, especially with the introduction of the Five-Year Plan in 1951, the government started external borrowings. This required the devaluation of the rupee.

After independence, India had chosen to adopt a fixed rate currency regime. The rupee was pegged at 4.79 against a dollar between 1948 and 1966.
Two consecutive wars, one with China in 1962 and another one with Pakistan in 1965; resulted in a huge deficit on India's budget, forcing the government to devalue the currency to 7.57 against the dollar.
The country needed to borrow foreign money again in 1973 to pay a bill for imported oil, so the rupee’s value was reduced again.
The value of the rupee has steadily declined year over year. In 2015, it was valued at 63.76 per dollar.
in 2022, its value falling to a lifetime low of 83.2 of the dollar.
currently in 2023 1 dollar is around 81 rupees.


BASIC TEMINOLOGY

The conversion rate between two currencies is known as the Exchange Rate. In simple words the ER is the rate at which one currency will be exchanged for other currency.

There are three types of Exchange Rates mainly.
1. Fixed Exchange Rate means that the government controls the exchange rate or the conversion rate of the currency.
2. Floating Exchange Rate means that the exchange rate of the currency keeps on changing based on the supply and demand in the market.
Today, everyone wants to buy US Dollar That's why its value is so high This is one of the many reasons.
There are other reasons behind the fluctuations of Supply and Demand as well.
3. The third type of Exchange Rate is the Managed Exchange Rate. Some countries say that they will allow the fluctuations in the value of their currencies based on the changing supply and demand in the market But only to a limit EXAMPLE?????

4. devaluation: When a government reduces the value of a currency on its own, for any reason, by increasing the supply, it is known as Devaluation. example By the time we reached the 1960s and 1970s there had been several wars Indo-Pakistan war and Indo-China war.
Our country had to suffer heavy losses again. Had to take loans from other countries. The country needed foreign investment to boost the economy. And foreign investment would've come only if there were incentives, such as cheap products, for investing in the country.
Because of this, the government changed the exchange rate again wherein $1 was around ₹7

Devaluation happens as To boost exports by making their products cheap making it competitive against the world market and To lower the cost of a country’s debt. By reducing the value of the currency, it will make debt payments cheaper over time.For example, if the government needs to pay $2 million every month in interest on its current debt, if it devalues its currency, the nominal interest payments are lowered. For example, if the currency is devalued by half, their interest payment in real dollars is only $1 million.

And when the value of a currency falls because of external factors it is known as Depreciation.

WHO DECIDES THE VALUE
The value of the Indian rupee to the US Dollar works on a demand and supply basis. If there is a higher demand for the US Dollar, the value of the Indian rupee depreciates and vice-versa.
As the currency demand is more, then the value of that particular currency would increase.
and as the demand for a currency is less, its value would decrease. Foreign investment leads to increased demand for rupee while increasing exports leads to increased supply of rupees, both these factors made the rupee appreciable.
the rising imports and foreign investors exit from the indian market are depreciating factors for the rupee. our currency will strengthen when the demand for indian currency in global market would increase.


QUESTION: Why the countries compare their currency with US Dollar?
ANSWER: The answer goes back all the way back to 1944 Bretton Woods Agreement which made the US Dollar the official leader of the World’s reserve currency supported by the world’s largest gold reserves. This was after the Second World War. Even today the USD is one of the world’s strongest currencies. Even today, the central banks of various countries, including India, hold almost 60% of their reserves in USD.

WHY INDIAN RUPEE IS FALLING AGAINST THE US DOLLAR?

In the post-Covid world of 2022, India has seen a steady decline in the value of INR against the dollar. It is imperative to understand that the Indian Rupee has steadily downgraded against the dollar for several decades. One of the key reasons for this has been the rising inflation affecting the Indian Economy.

1. Russia- Ukraine War
The Rupee was on the decline last year, after supply chain disruptions due to the Russia-Ukraine war where most of India’s crude oil and edible oil requirements are imported, this elevated price will continue to put pressure on the Indian Rupee.

2. Dependency on oil import

India is the third largest crude oil importing country in the world, coming only after US and China. India imports more than 80% of its crude oil requirements, thereby making it more vulnerable to changes in the international oil market. For example, if the crude oil prices increase, our total import cost will also increase, affecting our current account balance which in turn affects the currency market

3.COVID - 19
covid resulted in great economic setback. as most of the reserves were used up in the publoc and health sector. Tourism was heavily affected, the lockdown resulted no tourist activity to be conducted which reduced the demand for indian currency.

4. Huge current account deficit

In June 2018, India’s current account deficit rose to 42%, approximately $160 billion. Current account deficit is the difference between imports and exports of goods and service of a country. A huge dependency on crude oil imports and its increasing price, as mentioned before, affects our current account health, making the deficit larger.

How does a current account deficit impact Indian Rupee?

In simple words, an increasing current account deficit (of India) leads to an increase in the demand for Dollar. Why? Because we need more Dollars than before to finance our growing deficit, also paying for the imports. An increase in the demand for a currency leads to its appreciation. And if the US Dollar is appreciating against Indian Rupee, it means our domestic currency is depreciating.

5. US Fed (Federal Funds) rate changes

Since national economies share an intricate bond, the effects of US Fed rate hikes are felt in the Indian market as well. A hike in the fed rates (as was observed four times in 2018), strengthens the US Dollar, which in turn leads to a depreciation of the Indian currency.

6. The global market

The United States and China have been experiencing a trade war in 2018. As both are among the world’s largest economies, the trade war is set to affect the global economy. While the ball could fall on either side of the court for India, the situation has definitely created a growing unease among global investors and Indian economists.


How will the fall in Rupee affect Indian economy?


1. Cost of oil imports: Crude oil can be called a major engine for the growth and working of the Indian economy with its vast utilities. Since India imports more than 80% of its oil needs, a depreciation of Rupee will increase the cost of our humongous oil imports. This, in turn, can cause our current account deficit to worsen.

2. An increase in the import cost will directly affect the Indian corporate market for the worse.

3. Inflation: Domestic currency appreciation and inflation work in the opposite directions. So, a depreciation of the domestic currency means a potential increase in inflation.

4. To ward off an increasing inflation, the central bank of a country generally increases the interest rates. Consequently, people are able to borrow less money, and hence, they also have less to spend, keeping the inflation in check. Reserve Bank of India (RBI) might resort to increased interest rates too, further increasing the effect on corporates.