considering the depreciation of indian currency in the international market
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Depreciation of Indian Rupee
Even though the outlook on the rupee remains weak in the near future, the depreciation in local currency may not continue for a longer period as India remains the fastest-growing economy.
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Depreciation of Indian Rupee
02 Jan 2023 7 min read Tags: GS Paper - 3 Fiscal Policy Monetary Policy Capital Market
For Prelims: Depreciation of Indian Rupee, Currency depreciation, inflation, Depreciation Vs Devaluation, Appreciation Vs DepreciationFor Mains: Impact of Depreciation of Indian Rupee on economyWhy in News?
The Indian Rupee depreciated by around 10% against the US dollar and the rupee was the worst-performing Asian currency in 2022.
This decline was mainly on account of appreciation in the US currency on safe haven appeal amid fears of recession and inflation across many parts of the world and Russia-Ukraine war.
How did the Rupee Perform in 2022?
During the year, the rupee fell to a lifetime low of 83.2 against the dollar. Compared to rupee, depreciation of other Asian currencies was to a lesser extent.
During the year, the Chinese Yuan, Philippine Peso and Indonesian Rupiah fell around 9%. South Korean Won and Malaysian Ringgit declined by nearly 7% and 6%, respectively.
However, the Reserve Bank of India (RBI) heavily intervened in the forex market to defend rupee. Since the beginning of 2022, the country’s foreign exchange reserves have fallen by USD 70 billion. It stood at USD 562.81 billion as of 23rd December 2022.
Reserves have witnessed a bit of erosion but the central bank is now starting to again build up its reserves and that would act as a buffer in times of uncertainty.
What was the Reason for Capital Outflows?
The US Fed aggressively raised interest rates by 425 basis point (bps) in 2022 in its fight against inflation. This led to a higher interest rate differential between the US and India, and investors pulled out money from the domestic market and started investing in the US market to take advantage of higher rates.
In 2022, Foreign Portfolio Investors (FPIs) pulled out Rs 1.34 lakh crore from the Indian markets – the highest-ever yearly net outflow.
They withdrew Rs 1.21 lakh crore from the stock markets and Rs 16,682 crore from the debt market in 2022, putting pressure on the rupee.
Russian invasion of Ukraine accentuated the FPI withdrawals with the global economic slowdown making inflows tougher.
What may be the Impact of Depreciation on the Indian Economy?
Positive:Weaker rupee should theoretically give a boost to India’s exports, but in an environment of uncertainty and weak global demand, a fall in the external value of rupee may not translate into higher exports.
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.
India meets more than two-thirds of its domestic oil requirements through imports.
India is also one of the top importers of edible oils. A weaker currency will further escalate imported edible oil prices and lead to a higher food inflation.
What is the Outlook on Rupee for 2023?
Even though the outlook on the rupee remains weak in the near future, the depreciation in local currency may not continue for a longer period as India remains the fastest-growing economy.
The terminal interest rate for the US Fed was anticipated, but it cannot be the case that their monetary policy will be tightened endlessly.
When the (US Fed) tightening is over, the tide will surely turn.
What is Appreciation vs 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.
What are Devaluation and Depreciation?
In general, devaluation and depreciation are often used interchangeably.
They both have the same effect – a fall in the value of the currency which makes imports more expensive, and exports more competitive.
However, there is a difference in the way they are applied.
A devaluation occurs when a country’s central bank makes a conscious decision to lower its exchange rate in a fixed or semi-fixed exchange rate.
A depreciation is when there is a fall in the value of a currency in a floating exchange rate.
Considering the depreciation of Indian Currency (8) in the international market…
Considering the depreciation of Indian Currency (8) in the international market…
Class 12th Economic, Question paper 2023 - Considering the depreciation of Indian Currency (8) in the international market, the Reserve Bank of India (RBI) has decided to purchase Indian currency (R) in the open market." This represents _________ exchange rate system,
By Rohit Sharma - March 17, 2023
There are the Options for the Question: Considering the depreciation of Indian Currency (8) in the international market, the Reserve Bank of India (RBI) has decided to purchase Indian currency (R) in the open market.” This represents _________ exchange rate system,
(a)fixed
(b) flexible
(c) managed floating
(d)manipulated
This is a modal window.
No compatible source was found for this media.
The correct answer is – (c) managed floating
Why Is Rupee Falling And How will it impact the Indian economy and people?
Rupee at record low
Why Is Rupee Falling And How Will It Impact The Indian Economy And People?
On Wednesday, the rupee hit a record low of 79.03 against the US dollar, it has declined nearly 6 per cent since January this year
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Updated: 30 Jun 2022 8:30 pm
The Indian rupee has been on a downward spiral for the last few days and on Wednesday, it hit a record low of 79.03 against the US dollar. This has sparked a debate among analysts about whether the domestic currency could see further decline amid weak fundamentals.
The rupee is down nearly 6 per cent since January this year. However, on Thursday, it managed to recover from its record low after gaining 13 paise to hit 78.90 against the dollar.
Now, this is a double whammy for the common man with the country reeling under high inflation and the prices of everyday items drastically going up.
Union Finance Minister Nirmala Sitharaman, however, recently said that the Indian currency is relatively better placed than other global currencies against the greenback.
In the meantime, as the currency volatility continues, let’s decode what this means for you:-
Why Is Rupee Falling?The value of the Indian rupee to the US Dollar works on a demand and supply basis. If there is a higher demand for the US Dollar, the value of the Indian rupee depreciates and vice-versa.
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If a country imports more than it exports, then the demand for the dollar will be higher than the supply and the domestic currency like Rupee in India will depreciate against the dollar.
The rupee's fall these days is mainly due to high crude oil prices, a strong dollar overseas, and foreign capital outflows.
The rupee has been on the decline since early this year, especially after supply chain disruptions in view of the Russia-Ukraine war, global economic challenges, inflation, and high crude oil prices, among other issues.
Besides, there have been heavy foreign fund outflows from the domestic markets as the foreign institutional investors (FIIs) have sold shares worth $28.4 billion so far this year, outstripping the $11.8-billion sell-off seen during the Global Financial Crisis of 2008. The rupee has depreciated 5.9 per cent versus the dollar so far this calendar year.
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