Currency depreciation – Impact of Depreciation of Indian Rupee

Currency depreciation – Impact of Depreciation of Indian Rupee

Topic: Economy

Content:

Currency depreciation is a fall in the value of a currency in a floating exchange rate system.

Rupee depreciation means that the rupee has become less valuable with respect to the dollar. It means that the rupee is now weaker than what it used to be earlier.

For example: USD 1 used to equal to Rs. 70, now USD 1 is equal to Rs. 76, implying that the rupee has depreciated relative to the dollar i.e. it takes more rupees to purchase a dollar.

Cause-

Increase in supply of rupee relative to foreign currency, say US$.

• Balance of payment deficit
  • Decrease in net export i.e. Export-Import.
  • Net capital outflow i.e. capital outflow- capital inflow.
• Fall in relative rate of interest in India (comparatively higher rate of interest in foreign capital market lead to capital outflow)
• Higher crude oil prices/ higher global price of any imported goods that would  increase import bill.
• Wars/Pandemic leading to global supply chain disruption and uncertainty in consumer-investment expectation. For example-recent Ukraine War.
• Fall in the currencies of emerging market peers.
• Higher foreign denominated external debts- it will increase demand of foreign currency relative to domestic currency.

Impact-

Depreciation in rupee is a double-edged sword for the economy.

Positive: While a weaker currency may support exports as export becomes cheaper for foreign countries against which currency has been depreciated.

Negative: 

• It poses risk of imported inflation, and may make it difficult for the central bank to maintain interest rates at a record low for longer.
• The currency’s weakness makes imports costlier.
• It will be costlier for students studying in overseas universities as this is the time when they purchase dollars towards fees.
• A falling rupee can be a worry for those planning a holiday abroad.
• Importers of capital goods will see shrinkage in margins.
• Repayment of external debt becomes costly.