The rupee is under pressure. In 2022, it fell 3.5% against the dollar, hitting a record low. There are two reasons. One is the Russia-Ukraine War, and the second is that interest rates in the United States are expected to rise. Mentha examines the state of the rupee.
What is currency depreciation?
When the value of a currency against other currencies is weakened by the power of the market, the supply and demand of foreign currencies, it is called depreciation. On the other hand, if it is weakened by administrative measures, it will be devalued. The depreciation and devaluation processes are different, but there is no difference in terms of impact. India followed controlled or fixed exchange rates until it moved to a market-determined process or floating exchange rate system in 1993. China still sticks to the former.
What are the factors that influence currency fluctuations?
It depends on foreign trade, foreign investment, two-way travel, two-way remittances by expatriates, and net inflows and outflows of foreign currency through the receipt and provision of foreign loans and aid. Since mid-1996, when India opened its capital markets, the behavior of foreign institutional investors (FII) has been a major cause of rupee fluctuations. The recent depreciation is due to the fact that the US Federal Reserve’s rate hike is expected to soon be raised, leading to the withdrawal of FII from the Indian market, and the Russo-Ukraine War. High oil and commodity prices are also factors.
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How was the trend of the external value of rupees?
Rupee opened at the lowest level ever ￡March 8th, 76.984, was stabilized by the central bank’s timely $ 5 billion swap auction on the same day. In 2022, it fell 3.5% against the dollar. The financial crisis of 2008, the eurozone debt crisis of 2011-2012, and the tapering tantram of 2013 are examples of significant downward pressure on rupees.
What does the weak rupee mean for trade?
Under normal circumstances, a depreciation of the domestic currency will help boost exports. The Reserve Bank of India has also avoided market intervention to support exports. India’s imports, whether crude oil or other important items, have been adversely affected.Given that OPEC’s basket price is $ 127.93 / barrel, the landing price of crude oil on March 8, 2022 is ￡9,836.53 per barrel ($ 1 =) ￡76.89) ￡9,657.81 per barrel ($ 1 =) ￡75.49) As of February 28, 2022.
What is the impact on the economy as a whole?
The current account deficit will widen, depleting foreign exchange reserves and weakening the rupee. Soaring oil and other important imports are undoubtedly driving the economy towards cost-push inflation. Oil distributors may not be allowed to fully shift the burden of high procurement costs that affect government dividend revenues, questioning the budget deficit.
Jagadish Shettigar and Pooja Misra are BIMTECH faculty members.
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