RUPEE EXCHANGE RATE
1. Context
The Indian rupee breached the psychologically significant exchange rate level of 80 to a US dollar in early trade . It recovered some ground to close at 79.90.
2. What is the rupee exchange rate?
The rupee's exchange rate with the dollar signifies the quantity of rupees needed to purchase one US dollar. This metric is crucial not only for acquiring American goods but also for engaging in trade involving other commodities and services, like crude oil, which is conducted in US dollars. When the rupee depreciates, the cost of importing goods and services increases. However, for those exporting products and services, particularly to the United States, the depreciation enhances the competitiveness of India's offerings by making them more affordable for foreign buyers
Exchange rate for 1 Indian Rupee (INR) is as follows:
- United States Dollar (USD): 0.012011 INR
- Euro (EUR): 0.011223 INR
- British Pound (GBP): 0.009784 INR
- Australian Dollar (AUD): 0.018827 INR
- Singapore Dollar (SGD): 0.016343 INR
- Swiss Franc (CHF): 0.010845 INR
- Malaysian Ringgit (MYR): 0.056619 INR
- Japanese Yen (JPY): 1.824210 INR
3. Effects on rupee
- If the rupee experiences a faster depreciation rate than its long-term average, it surpasses the dotted line, and vice versa.
- Over the past couple of years, the rupee has demonstrated greater resilience than the long-term trend, but the current decline indicates a correction.
- When considering a diverse range of currencies, data indicates that the rupee has strengthened or appreciated against this basket.
- To clarify, while the US dollar has strengthened against various major currencies, including the rupee, the rupee, in contrast, has strengthened compared to many other currencies like the euro. For example, forex reserves have decreased by over $50 billion between September 2021 and now. Over these 10 months, the rupee's exchange rate with the dollar has declined by 8.7%, from 73.6 to 80.
- To provide context, historically, the rupee typically depreciates by around 3% to 3.5% in a year. Moreover, many experts anticipate further weakening of the rupee in the next 3-4 months, potentially falling to as low as 82 to a dollar.
4. What is rupee depreciation?
Rupee depreciation refers to a decrease in the value of a country's currency, specifically the Indian rupee in this context, in comparison to other currencies. It means that more units of the domestic currency are required to purchase a fixed amount of foreign currency, usually the US dollar. Depreciation can occur due to various factors, including changes in supply and demand for the currency in the foreign exchange market, economic conditions, inflation rates, and geopolitical events
When the rupee depreciates, it has several implications:
Import Costs: Imported goods and services become more expensive, as it takes more rupees to buy the same amount of foreign currency needed for these transactions. This can contribute to inflationary pressures in the economy.
Export Competitiveness: On the positive side, a depreciated rupee can make the country's exports more competitive in the global market. Foreign buyers find the country's products and services relatively cheaper, potentially boosting export volumes.
External Debt: Countries with significant external debt denominated in foreign currencies may face increased repayment burdens when their domestic currency depreciates. Servicing debt in stronger foreign currencies becomes more expensive.
Inflation: Depreciation can contribute to inflationary pressures by increasing the cost of imported goods and raw materials.
5. Effects on the Indian economy
- Due to a substantial portion of India's imports being priced in dollars, these imports will become more expensive.
- An illustrative example is the higher cost associated with the crude oil import bill. The increased expense of imports, in turn, will contribute to the expansion of the trade deficit and the current account deficit.
- This, in consequence, will exert pressure on the exchange rate. On the export side, the situation is more complex, as noted by Sen.
- In bilateral trade, the rupee has strengthened against many currencies. In exports conducted in dollars, the impact is contingent on factors such as how much other currencies have depreciated against the dollar.
- If the depreciation of other currencies against the dollar is greater than that of the rupee, the overall effect could be negative.
6. Way forward
Defending the rupee will simply result in India exhausting its forex reserves over time because global investors have much bigger financial clout. Most analysts believe that the better strategy is to let the rupee depreciate and act as a natural shock absorber to the adverse terms of trade
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For Prelims: Inflation, Deflation, Depreciation, Appreciation
For Mains: General Studies III: How does Depreciation of rupee affect Indian economy
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Previous Year Questions
1. Which one of the following groups of items is included in India's foreign exchange reserves? (UPSC CSE 2013)
A.Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries B.Foreign-currency assets, gold holdings of the RBI and SDRs
C.Foreign-currency assets, loans from the World Bank and SDRs
D.Foreign-currency assets, gold holdings of the RBI and loans from the World Bank
Answer (B)
2.Which one of the following is not the most likely measure the Government/RBI takes to stop the slide of Indian rupee? (UPSC CSE 2019)
A.Curbing imports of non-essential goods and promoting exports
B.Encouraging Indian borrowers to issue rupee-denominated Masala Bonds
C.Easing conditions relating to external commercial borrowing
D.Following an expansionary monetary policy
Answer (D)
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Source:indianexpress
