Whenever the value of a currency falls, it badly impacts that nation’s economy and results in a higher rate of inflation. The value of any currency falls or rises based on the demand for one currency over another. For example, if there is a higher demand for the US dollar than the Indian Rupee then the value of the Indian rupee falls against US Dollar and vice-versa. The demand for a currency is driven by the nation’s total imports and exports. Like if India imports more than it export it raises the demand for the US dollar oversupply thus resulting in a fall in the value of the Indian rupee against the US Dollar.
Rupee Falls Against US Dollar
How does the Value of the Indian Rupee fall against US$?
India is a major importer of some basic amenities like crude oil, metals, electronic items, etc. And whenever India imports anything more another nation makes payment in US$. Thus when the Indian Rupee is falling, against US Dollar, India needs to pay more for the same item. This results in increases in the actual price of the stuff and this price hike keeps on passing from manufacturer to the customer. Thus whenever the Indian Rupee falls against US$ the prices of essential goods and services increase.
On Tuesday, July 18th, 2022 the Indian rupee observed a record low of INR 80.05 in the international market.
What are the Main Reasons Behind the Fall of the Indian Rupee?
The value of a currency is driven by many factors and thus it’s and rises and can’t depend on any single factor. The below reasons are mainly responsible for the fall in the value of the Indian rupee.
- One of the most important factors that contributed heavily to the fall of the Indian rupee is the fluctuation in global oil prices. As India is not a massive oil-producing country and imports more than 80% of oil from other nations to meet its fuel demand. So whenever the oil prices observe a price hike the spending on total oil imports of India increases against its export. In the last 3-4 months crude oil has observed a huge price hike due to the Russia-Ukraine war. The per barrel price of crude is constantly increasing from USD 110 per barrel to USD 122 per barrel in July, thus significantly affecting the value of the Indian Rupee.
- A heavy outflow in foreign funds from the domestic market is also an important reason for the depreciation of the Indian Rupee. From the beginning of Fiscal 2022-23 till now the foreign investors sold shares worth more than 28.4 billion US dollars. This figure for foreign fund outflow is even more than that of 11.8 billion UD dollars during the Global Financial Crisis of 2008.
- Other reasons for the decrease in the value of the Indian rupee are unemployment, economic challenges, and higher inflation rates.
From the beginning of the financial year 2022-23 till today, the value Indian Rupee has observed a decline of more than 6%.
How does the Fall of the Indian Rupee Affect the Indian Economy?
The value and performance of a currency have a huge impact on its economy, as the currency performs well the economy performs well, and vice-versa. A fall in the value of the Indian Rupee badly affects the economy as the rate of inflation increases in the country. However fall in the currency improves the exports of the nation as it becomes cheaper for foreign buyers, but as per the current scenario, there is a huge reduction in the overall global demand. Thus the total exports from the nation also decreased contributing furthermore to the fall of the Indian rupee. With the fall in the Indian rupee, the MSME sector gets badly impacted and thus resulting in job losses and increases unemployment.
The GOIs and RBIs Stand on the Falling of the Indian Rupee:
Whenever there is a huge drop in the value of the Indian Rupee the government of India and the Reserve Bank of India takes necessary actions to control the depreciation of the Indian rupee. To control the falling of the rupee against the Dollar, the RBI and GOI can be seen taking some steps discussed below.
- Restricting imports of non-essential goods or increasing the import duty on the same.
- To balance the currency rates the Gold deposits can be increased.
- Promoting foreign direct investments to increase the capital inflow.