“Why do we fall? So that we can learn to pick ourselves up.”
From Christopher Nolan’s hit Batman Begins, this remains one of the most inspirational quotes, often giving one strength in hard times. However, that does not seem to apply to the Indian Rupee as after a gradual fall in its value, the Rupee sank to an all-time low of Rs 80 per US Dollar on 18th July 2022.
The US Dollar serves as the world’s most dominant currency, and is hence regarded as the benchmark for other currencies as it determines their value in the universal market. Hence, the Indian Rupee is also compared against the dollar to determine its value. Back in 2000, the Dollar was equal to Rs 44. A little over two decades later, after being down nearly 6% since January 2022, the value is almost double than that in 2000’s.
What particularly are the causes for fall in value?
In a written statement in Parliament, Finance Minister Nirmala Sitharaman attributed the rupee’s fall to external reasons. She said, “Global factors such as the Russia-Ukraine conflict, soaring crude oil prices and tightening of global financial conditions are the major reasons for the weakening of the Indian Rupee against the US Dollar.”
In simple terms, the value of the Rupee, much like all other commodities, works on a demand and supply basis. If there is a higher demand for the US Dollar, the value of the rupee decreases and vice-versa. India’s imports are more than its exports, hence the demand for Dollar is higher than supply and that is why the Rupee depreciates against the dollar.
Like the Finance Minister said, the current state of the Rupee is due to high crude oil prices. India depends heavily on crude oil imports to meet its energy requirements. Whenever oil prices rise, it affects the Rupee as India’s export bills rise due to the high prices and if oil prices are rising, it means the cost of imports are rising as well. This pushes up the demand for the US Dollar which strengthens it even more against the rupee.
Also, there have been heavy foreign fund outflows from the domestic markets as the foreign institutional investors have sold shares worth $26.4 billion. As money flows out of India the exchange rate gets impacted due to a higher supply of the Rupee, which also depreciates the Rupee.
Impact of the fall in value:
The biggest impact of a weakening Rupee is inflation. India will have to pay more for the same quantity of imported goods than it did before. In such a case, the cost of raw materials and production increases for the producer, which will lead them to increase the price of their goods, and thus the consumers have to pay this increased price. This can be seen in the increasing fuel prices. Adhil Shetty, CEO of BankBazaar said that electronics are also set to be expensive since several components of such devices are imported.
The fall in value also means that those who want to pursue education abroad will have to spend more in rupee terms. Those remitting money from abroad will also see an increase in their expenditure.
The fall in value can also cause an increase in exports. The goods will be cheaper for the foreign consumers of Indian goods, so they would likely buy more of the goods. However, this does not guarantee more profit as India’s key export items such as gems and jewellery, automobiles etc have a high import content. Due to increase in the price of raw materials, their cost of production also increases, thus reducing their margins.
What does the future hold?
Several analysts believe that the Rupee could decline further against the dollar in the foreseeable future as oil prices rise and the foreign investors continue their sell-off.
However, the RBI is working to stall this fall as Governor Shaktikanta Das said that the RBI is for an orderly appreciation or depreciation in the currency and is intervening in all market segments to curb volatility. The RBI has foreign exchange reserves of almost $600 billion, which it has been using to protect the rupee. There are chances that the RBI may step in further as the Rupee further declines.
Did you know?
The rupee was once worth more than the dollar as in 1925, 1 USD was equal to 0.1 Rupee.
BY:
Shashwat Sharma
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