Reasons for Depreciation of Indian Rupee Against the Dollar

Context

In the year 2022, the Indian rupee depreciated by around 10% against the US dollar 2022 on account of the sharp appreciation of the greenback, which resulted from the fear of recession and inflation across many parts of the world and due to the Russia-Ukraine war.  

Probable Question

Explain the factors responsible for the decline in the value of the Indian Rupee the vis-a-vis U.S. Dollar recently. How depreciation affects an economy? (150 words, 10 marks)

About the Rupee in 2022

• In the year 2022, the rupee was the worst-performing Asian currency in 2022, with a decline of around 10% against the greenback, whereas other Asian currencies fell between 6-9%. 
• The rupee fell to a lifetime low of 83.2 against the dollar. Its foreign exchange reserves have fallen by $70 billion.

Reason Behind Capital Outflows

• Inflation: To fight against inflation, the US Fed has raised interest rates by 425 basis points (bps) in 2022. 
• Safeguarding money: Investors used this opportunity and in 2022 they pulled out around Rs 1.34 lakh crore from the Indian market (the highest ever) and started investing in the US market, to take advantage of the higher interest rates.
• Increase in Crude oil Price: The higher crude oil price is also another reason that caused investors to ditch the riskier Indian assets and invest in other safer alternatives available.
• Global Economic Slowdown: The Russian invasion of Ukraine accentuated the FPI withdrawals with the global economic slowdown making inflows tougher.
• Higher Import Inflation: The falling rupee is also caused by higher import inflation and resulted in a growing trade deficit, which also caused the rupee to fall.
• Widening Current Account Deficit (CAD): Widening CAD along with persistent risk-off sentiment owing to geopolitical tensions and a strengthening dollar index have put depreciating pressure on the rupee.

Image source: Money Control 

Also Read: Indian Govt. is pushing for International trade in Rupee

Forex Reserve and Rupee Exchange Rate 

Impact of Rupee Depreciation on the Indian Economy

• Depreciation reduces the currency value of a country as compared to other countries.
• Depreciation makes imports more expensive, as the currency weakens.
• The fall in currency causes inflation, as the goods become expensive, feeding into domestic retail inflation through higher prices of petrol and diesel.
• For corporates and the government, the implications are the expensive overseas debt in US$ to service and redeem (repay).
• There will be a direct and indirect impact on household items. Electronic goods will also become expensive due to expensive imports.
• Industries dependent on export such as pharmacy and IT will be benefited from the depreciating rupee, whereas those industries that are import dependent will be at a loss and the ultimate burden will be on end users.
• The falling rupee also implies that fresh capital investments in infrastructure sectors like solar and wind energy, which are mainly dependent on imports will be adversely affected.
• It will also impact those who are planning to study abroad or travel abroad.

Also Read: What are Green Debt Swaps and How Do They Work?

The Outlook on the Rupee for 2023

• Indian economy is the fastest growing economy, hence the depreciation will not last long.
• The move of the US Fed will also not last longer thus the tide will surely turn.
• RBI has now started to again build up its reserves and that would act as a buffer in times of uncertainty.

News Source: The Indian Express, The Times Of India

https://indianexpress.com/article/explained/explained-economics/why-rupee-fell-against-the-us-dollar-in-2022-explained-8355720/

https://timesofindia.indiatimes.com/business/india-business/explained-what-a-falling-rupee-means-for-indias-economy-and-your-finances/articleshow/92693455.cms

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