Rupee Depriciation - The Falling Indian Rupee

The rupee is the common currency of India and its neighboring country Pakistan. Each country has its own currency that facilitates transaction both within domestic and global market. Europe is an exception to this where a group of countries in the euro zone area follow a single common currency. Ever since the globalization of world economies the value of each currency changes or fluctuates rapidly due to increasing transaction of goods and services. But this is not the only factor for the change in the value of currencies around the world. There are various factors for the currency of each country to appreciate and depreciate. In this article we will look at one of the macroeconomic concern India is facing recently, the depreciation of rupee.

The US dollar is considered to be the global currency and forerunner of the world currencies. The value of each currency around the world is compared against the US dollar to know the real value of the respective currency in a particular period of time. The interesting thing about currencies is that it changes every day with respect to the behavior of the markets. However, one has to know that each currency is traded with other currencies all over the world and in that aspect the value of a particular currency varies with the value of each currency of the countries across the world. Have you ever wondered what rupee has got to do outside our country? Does it hold any significance in the foreign market? Why is it important to know the value of our rupee? Why is it necessary to keep our rupee value high?  If you have given a thought about it, am sure you have an interest in knowing the economic condition of our country and if you haven’t let us try to seek answers to understand what is really happening around the world in terms of our monetary value because it plays a significant role in the economy.

First, we will get the basics right. Now and then almost every day we hear that the rupee is weakening against the dollar. We see in newspapers that the rupee falls to an all time low on a daily basis. So what is it actually means? The rupee or any currency is said to appreciate or depreciate over a period of time. Generally, it is good if the value of rupee appreciates i.e the value of Indian rupee against the dollar strengthens. But the Indian rupee in the recent years is undergoing continuous depreciation i.e its real value is weakening against the US dollar which is really bad to our economy. It not only affects the economy but it also influences our spending on goods and services. Example, at a point of time let us say the rupee value is Rs.55/$ which means that we have to shed out Rs.55 for each dollar we consume. Later, the value is Rs.52/$ which means that the rupee value has appreciated or strengthened against the dollar that will make us spend less against the dollar. On the economy side it affects the cash inflows and outflows, capital inflows and outflows, foreign reserves and foreign trade. On our expenditure side the imported goods becomes expensive when the rupee depreciates. In this globalized world most of the products that we buy are mostly imported as we look for superior quality and better choices.

The Indian rupee can be converted into any other currency. The rate at which we convert one currency into the other currency is known as the conversion rate. This rate changes on the daily basis based on the demand and supply of the currencies. The Indian rupee can be converted into dollar based on the prevailing rate on that day and this is usually done in a foreign exchange market or a commercialized bank. The Indian rupee appreciates and depreciates for various reasons and there is no straight cut answer as to explain why the currency value changes on a daily basis. But there are few common reasons as to understand why the Indian rupee changes against other currencies. Generally, economic conditions of other countries say US influence the Indian rupee. If the US economy is performing well there will be a huge demand for dollar and people tend to sell rupee and buy dollar. This strengthens the US dollar against the Indian rupee and the value of rupee is said to depreciate against dollar. The value of Indian rupee is determined through various factors such as forex reserves, FDI & FII inflows, rate of interest, exchange rate and so on. With the change in the indicators, the value of rupee as per the dollar changes. So now you know that just like any other commodity the rupee also has a price, the value you pay to exchange a rupee.

The rupee value mostly fluctuates with changes in the behavior of the market. The spot and share market greatly affects the rupee value and is influenced by the changes in the value of rupee. Each currency value depends on the domestic macroeconomic condition of the country. The rupee value changes if we expect any changes in the fiscal and monetary policies. The rupee value also tends to move along with the speculation of the markets and its agents. The trading market opens and closes on the value of rupee against the US dollar thus equity investors and corporate tend to track the values of the currencies. In the last few months demand for dollar by oil companies and increasing selling pressure in domestic equities precipitated the fall of rupee. The major reason for the fall in rupee is the immense strength of the dollar index which reached its three year high of 84.30. The record setting performance of the US equities and improvement in the labour market has made Americans and global rating agencies more optimistic of the outlook for US economy, thereby spurring greater hopes. And also the strengthening of dollar against major currencies globally aided the fall. The increasing demand for oil and gold imports has also affected the rupee. This continuous depreciation of the rupee makes our struggling economy further vulnerable as imports become costlier, inflation risk higher, growth plummets as a result of low aggregate demand and record high Current Account Deficit worsens. Negative capital inflows in the recent months also impacted the currency value to slide. Political and domestic market uncertainity has also added to the woes.

The changes in the value of rupee either appreciating or depreciating influence a whole lot of economic agents mainly the exporters and importers. The fluctuation has both positive and negative aspects. Rupee depreciation brings cheers to exporters on the long run as they will get more money against other currencies when they sell their goods. Indian companies borrowing money from other countries will benefit big time as they get more rupees for the dollars they bring in. Similarly, families of NRIs remitting money from abroad get more rupees. If a foreign MNC is planning to invest in Indian business for lesser dollars they will get more value in India. Broadly, for those who receive dollars it is happy time. On the other hand a falling rupee brings rib tickling experience to importers. Indian importers have to shed out more rupees for the goods they buy against dollars. Overseas travel will become expensive as you need to allocate more rupees to get the same amount of dollars. The budget of parents whose children staying abroad will feel the pinch of a depreciating rupee.  If you look at the trade data of India over the years you will see that Indian imports exceed the exports. At the end a depreciating rupee is just bad for the majority of us. If you see weakening of all currencies against the dollar, the rupee is also not unaffected in that sense. But this is panic in the market which is unwarranted. Experts are already forecasting the rupee to sink further to near 60 levels against the dollar. It is also expected that the Indian rupee may depreciate 10% versus the US dollar by the end of December. According to Nomura, a Japanese financial services company, a 10% depreciation in rupee value cause the CAD to rise by 0.4%. In the last few months there were no visible signs of RBI intervention to check rupee slide. Unless RBI takes some kind of steps to stabilize the currency the rupee may touch alarming levels. As the rupee is depreciating at a faster rate RBI is highly expected to intervene to check the volatility of the market as a result of a falling rupee and control it from falling further to improve the market sentiment and meet the various other macroeconomic challenges. The present value of rupee against the US dollar as on June 20th is 59.57 a great fall in the last ten month following US Fed chief Ben Bernanke's revelation on plans to withdraw on quantitative easing stimulas this year as US economy has started to grow. The following graph shows the rupee movement against the US dollar since 2000.