Depreciation of the Indian Rupee

Nishtha Sharma

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

India Rupee per U. Dollar Currency Exchange .S.

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

If inflation becomes a prolonged one. thus a depreciating currency makes its imports costlier in the International market. Under such conditions foreign investors tend to stay away from investing. • 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.• Persistent inflation: India has experienced high inflation. • Current Account Deficit: Indian exports more than it imports. it leads to overall worsening of economic prospects and capital outflows and eventual depreciation of the currency. .

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.Impact of the falling rupee on the Indian economy • Rising import bill. India imports close to 70% of its net fuel requirements. • The depreciating rupee will add further pressure on the overall domestic inflation and since India is structurally an import intensive country .

. • 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.• The exporters gain from the depreciation of Rupee as they get more of the local currency in exchange of the foreign one. • Emigrants living outside India also benefits from this depreciation.

If Rupee DEPRECIATES If Rupee APPRECIATES (For example.to Rs55/) Imports become costly as for each USD we have to pay Rs5/more. IMPORTS BECOME CHEAPER Exporters will earn lower revenue. For exports of each Dollar.50/. EXPORTERS EARN MORE Exporters Indians Who Wish to Go on Holidays Abroad For each dollar taken abroad for spending. TRIP IS COSTLIER For each dollar he intends to take abroad for spending.to Rs 47/Imports become cheaper as for each USD we have to pay Rs3 less. now the exporter will get Rs 3 less. the traveller has to pay Rs3 less and thus his trip will become cheaper. when US$INR moves from Rs. EXPORTERS EARN LESS Effect on Importers (For example. For exports of each dollar. when US$INR moves from Rs50/. the exporter will get Rs 5 higher. TRIP IS CHEAPER . IMPORTS BECOME COSTLIER Exporters will have higher revenue. the traveller has to pay Rs 5 more and thus his trip will become costlier.

• 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).what can be done. Direct Tax Code (DTC) . capital controls could be eased to allow more capital inflows. • Make Investments Attractive -Easing Capital Controls.? • Using Forex Reserves: RBI can sell forex reserves and buy Indian Rupees leading to demand for rupee..Steps ahead.

Thank you… .

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