RUPEE DEPRECIATION

RUPEE DEPRECIATION

Subject : Economics

Context : The rupee’s near-term fortunes may directly be influenced by the Reserve Bank of India’s intent on preventing any further depreciation in the currency as the surge in COVID-19 cases hits jobs and growth, economists and traders said.

Concept :

Appreciation and Depreciation of Currency

• In a floating exchange rate system, market forces (based on demand and supply of a currency) determine the value of a currency.
• Currency Appreciation: It is an increase in the value of one currency in relation to another currency.
• Currencies appreciate against each other for a variety of reasons, including government policy, interest rates, trade balances and business cycles.
• Currency appreciation discourages a country’s export activity as its products and services become costlier to buy.
• Currency Depreciation: It is a fall in the value of a currency in a floating exchange rate system.
• Economic fundamentals, political instability, or risk aversion can cause currency depreciation.
• Currency depreciation encourages a country’s export activity as its products and services become cheaper to buy.

The following are some of the principal determinants of the exchange rate between two countries.

• Differentials in Inflation
• Differentials in Interest Rates
• Current Account Deficits
• Public Debt
• Terms of Trade