Indian Rupee is constantly losing its value against US Dollar, starting from 1947 when $1 = ₹ 3.3 and now $1 = ₹ 80. In this blog post, you will know about why the rupee value falls. And how is this falling rupee value will impact you?
Why is the Rupee Fall?
The fall in the rupee value is mainly because of 2 reasons Rupee Depreciation, and Devaluation.
Rupee Devaluation
Rupee Devaluation means RBI decides to devalue the Indian rupee. Why does the Government want to devalue its currency?
When India devalued its currency(rupee), all the international countries find India cheap relatively when compared with their own country or other countries.
For example, now $1 = ₹ 80, and if the government decides to lower its currency to $1 = ₹ 100, then it is called the devaluation of the rupee against the US Dollar. When this happens, businesses in the US now see an opportunity to come to India for cheap labor costs, because now they can get ₹100 for $1 earlier it was only ₹80 for the same $1.
This strategy is successfully implemented by China many times so that many countries established their manufacturing plants in china because of cheap labor costs resulting in most of the electronic gadgets you own being “Made in China” today.
Rupee Depreciation
Rupee Depreciation means without any decision from any controlling body the value of the rupee is going down by the market forces.
Market Forces are nothing but Demand & Supply.
How do this demand and supply work?
When you go abroad for education, what do you buy first? Laptop? Charger Adapter? Or a flight ticket?
NO.
You will buy their currency first. If you are going to the US, then you will buy US dollars first.
In simple terms it means, you are selling Indian rupees and buying US dollars. When more and more people are doing the same for various reasons like education, or vacation all are selling rupees and buying Indian dollars so that demand for US Dollar increases, and whenever there is a demand then ultimately the price will rise.
This is an oversimplified example. But this is what exactly happens.
India import($59 Billion) more than its exports($37.29 Billion). The difference between imports and exports is called as current account deficit. It means Indians are more dependent on foreign products. And all the international trade happens in dollars, to import India first buys dollars. So this drives the demand for the dollar and results in the weakening of the Indian rupee.
Reasons for Rupee Depreciation?
1. Current Account Deficit.
As discussed in the above example, the current account deficit is one of the key reasons for the rupee’s fall. When imports are high it means we are selling Indian rupees to buy foreign products and this selling create demand for the US dollar, at the same time since we are selling Indian rupees it creates an excess supply of rupee in international markets. Whenever there is an excess supply then the price will go down. Thus finally the value of the rupee falls.
2. Capital Out Flows
Investments coming into India from foreign countries are called Foreign Direct Investments. Below is the table of investments FDI made in India from 1991 to 2015.
In 2021, India received $83 Billion in FDI inflows.
When these investments go out of India are called Capital Outflows. And these capital outflows will create an excess supply of rupees in international markets thus resulting in the fall in Indian Rupee.
3. Increasing Crude Oil Price.
As discussed above India is a net importer. And Crude Oil is highly imported to India. When the price of crude oil increases, to import the same amount Crude Oil India now needs to pay more leads to sell more and more rupees that again creating an excess supply of rupees and the rupee falls again.
4. Investor's interest & rising interest rates.
Foreign Institutional investors invest in the Indian Stock Market. Now inflation is high in most parts of the world. To control inflation Every country is increasing interest rates.
When the interest rates are high, it means the investor can get high returns without any risk.
So during uncertainties or any kind of Economic slowdown why the Foreign institutional investors take the risk by investing in any developing country like India while they can get good returns with safety?
So when there are economic issues and uncertainties, FII usually takes out their investments from India and keeps their money in safe investment options like US Bonds.
This increased demand for the US Dollar and supply of Indian Rupees results in the rupee fall.
How can India increase the value of the Rupee?
The main problem with the rupee fall is because of less demand for Indian rupees in International markets, you should have understood by now from the above discussion. If we can increase the demand for the Indian rupee in international markets then that can support the rupee.
One such step is considering buying Crude Oil in Rupees instead of Dollars. So this can increase the demand for rupees. Let us see whether it is implemented or not.
Few other ways the rupee can gain value:
- Foreign Tourism
- Make in India
- Less depend on imports, manufacturing in India, and exporting to other countries.
If India becomes less dependent on foreign products then it can strengthen the Indian Currency. For example, India imports Crude Oil in high quantity, if India develops a good infrastructure for transportation, and public transport becomes cheap than personal vehicles, people prefer public transport so the fuel consumption is reduced.
Or else, if India focuses more on Renewable energy then also the fuel consumption drops with the growth of EV vehicles.
Effect on You?
- India is the net importer of Crude Oil. so import price goes higher. This will lead to a price rise in Fuel. And since many companies need to transport their goods so their transportation cost will go high and companies will finally also raise the prices of their products and services. Inflation Raises. If your salary doesn’t rise with the inflation you may face the heat.
- Cooking Oil price increase.
- Foreign Education becomes costly, because of rupee value is reduced. To do your masters you need to pay more rupees to buy dollars to complete your education.
- Foreign Vacation becomes costly.
Opportunities for India with Rupee Fall?
Is there everything bad that happens when the rupee falls? No. You can find some opportunities when with rupee fall.
Companies that export to the US will get benefited when the value of the rupee falls. For example, the IT Sector and the Pharma Sectors Export their products and services to foreign countries. So these sectors get benefited.
Conclusion
Country Currency strength is not an indicator of country growth. Japan is an example, for 1 rupee we can get 1.7 Japanese currency, Yen. Does it mean japan is less developed than India? NO.
Currency is just a unit in one’s country to trade for products and services.
If you are earning 15 Lakhs per annum in India and someone in the US earning $60,000. Do say that person in the US earns (47Lakhs – $1= ₹79.42) more than a person in India. But the truth is a person in India is earning more than a person who is in the US.
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