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Implications of the Falling Rupee: India and the World

A quick guide to understanding the effects of the falling rupee on the Indian economy and the rest of the world.


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Kushagra Agarwal

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University Maharaja's College

2 years ago | 6 min read

The Indian rupee has been on a downward spiral for the past few months. According to the Reserve Bank of India (RBI), the currency has lost around 4.015 % of its value against the US dollar since January 2022. Also, if compared to the last ten years, the rupee has depreciated by almost 43%. (Source: RBI Reference Rate Archive)

The falling rupee is not just a phenomenon that is restricted to India. It is part of a global trend wherein the US dollar has been on the rise. This trend has affected many countries, and India is no different.

The fall in the value of the rupee has caused a lot of concern among economists and policymakers alike. While some believe this is advantageous for India's export sector, others think it could negatively affect its economy.

So, why is the rupee falling? Is it any cause for alarm? And what does this mean for India and the world? Well, let's take a closer look at the situation.

Why Is Rupee Depreciating Against US Dollars?

Several factors have contributed to the falling value of the rupee. These include -

Increase in Oil Prices

India is a major importer of crude oil, and the recent price hike has strained the country's finances. The main reason for this hike is the ongoing war between Ukraine and Russia.

As India purchases crude oil in US dollars, the increase in prices has led to an outflow of foreign currency. This, in turn, has put pressure on the rupee.

According to QuantEco Research, a $10 per barrel increase in India's crude basket might cut ten basis points from the annual GDP growth estimate of 9.2% for FY22.

The US-China Trade War

The trade war between the US and China is another factor contributing to the falling value of the rupee. The two countries are engaged in a tit-for-tat tariff battle, which has led to an overall deterioration in global trade. The US-China trade war has led to a slowdown in the global economy, and India is feeling the brunt of it as well.

Outflow of Foreign Portfolio Capital

Foreign portfolio investors have been pulling out of India for the past few months. According to India's Finance Ministry, foreign portfolio investors withdrew nearly $14 billion from Indian equity markets so far in 2022-23.

Foreign portfolio investors are withdrawing money due to the following reasons -

  1. Global economic slowdown
  2. Rising interest rates in the US
  3. Inflation in India
  4. Concerns over high CAD (capital account deficit)

As more and more foreign investors pull out their money from India, the country's foreign exchange reserves are depleting. This outflow of foreign currency is putting further pressure on the rupee and is contributing to its depreciation.

Multiple Lockdowns Due to COVID-19

The COVID-19 pandemic has led to multiple lockdowns in India and other parts of the world. The pandemic has resulted in a slowdown in economic activity and has adversely affected many businesses.

The lockdown has led to a decline in demand for goods and services. This, in turn, has impacted the country's exports. Also, the pandemic led to a decrease in tourist footfalls. These factors directly resulted in a decline in foreign currency inflow, putting pressure on the rupee.

Foreign Dependence

India is dependent on other countries to import several goods and services. This dependence has increased over the years.

According to India's Ministry of Commerce and Industry, the country's merchandise imports in December 2021 totaled USD 59.27 billion, a 38.06% rise from USD 42.93 billion in December 2020.

As a result, India is paying more and more US dollars to import goods and services to meet domestic demand. Foreign dependence is depleting India's forex reserves and contributing to the depreciation of the Indian currency.

Implications of Falling Rupee on the Indian Economy 

The falling value of the rupee has a number of implications for the Indian economy. These are mostly the negative effects of the falling rupee.

Let's take a look at some of these implications in detail -

Increase in Price of Imported Goods

Imported items become more expensive as the value of the rupee declines against the US dollar. This is because when the value of the rupee falls, it takes more rupees to buy a dollar. This means that more Indian currency is required to buy the same amount of foreign goods.

As a result, the imported goods are sold at a higher price in the domestic market to recover the cost. High prices, in turn, lead to inflation in the economy.

Increase in Inflation

Inflation is defined as a sustained increase in the general price level of goods and services in an economy over a period of time.

As mentioned earlier, a depreciating rupee leads to an increase in the price of imported goods. This, in turn, leads to inflation.

High inflation is a matter of concern as it adversely affects the economic growth of a country.

Increase in Current Account Deficit (CAD)

The current account is a part of the Balance of Payment (BOP) which records a country's imports and exports of goods and services, income, and unilateral transactions. When a country's imports of goods and services exceed its exports, it runs a current account deficit.

As the value of the rupee falls, India's imports become more expensive. This increase in the price of imports leads to an increase in CAD.

When CAD increases, a country has to finance the deficit through its foreign exchange reserves. This leads to more foreign currency outflow, thereby further depreciating the currency.

Increase in Cost of Borrowing

In order to control inflation, the Reserve Bank of India (RBI) uses various quantitative and qualitative measures.

One of the most frequently used quantitative measures is the repo rate. The repo rate is a rate of interest at which RBI lends money to commercial banks for their short-term needs.

In case of inflation, RBI increases the repo rate. When RBI increases the repo rate, it becomes more expensive for commercial banks to borrow money. As a result, they pass on this cost to borrowers through higher interest rates on loans.

High-interest rates make loans more expensive and affect the economic growth of a country.

Increase in Cost of Foreign Travel, Education, Medical Treatment, and Other Services

As the rupee depreciates against foreign currencies, the cost of foreign travel, education, and other services increases. This is because Indian citizens now have to spend more Indian currency to buy the same amount of foreign currency.

The increased cost of foreign travel and services is never good for a country. It adversely affects its citizens' growth, development, and living standards.

Implications of Falling Rupee on the World Economy

The falling value of the rupee has implications not only for the Indian economy but also for the world economy. These implications can also be termed as benefits of the falling rupee.

The following are some of the implications of the falling rupee on the world economy -

Increase in Exports

As the rupee depreciates, Indian goods become cheaper in the international market. This is because foreign buyers can now purchase more goods for the same amount of money. This makes India's goods more competitive and leads to an increase in exports.

Increase in Foreign Investment

A falling rupee makes India a more attractive destination for foreign investment. This is because when the value of the rupee falls, foreign investors can buy more Indian assets for the same amount of money.

As a result, foreign investors can get more bang for their buck.

Inflow of Foreign Remittance

Foreign remittances are money transfers foreign workers make to their families or other individuals in their home countries.

When the rupee falls, foreign workers can get more Indian currency for the same amount of foreign currency. As a result, more and more foreign workers are likely to send money back to their families in India.

An increase in the flow of foreign remittances is beneficial to any country since it results in an inflow of foreign currency.

Reduce Current Account Deficit (CAD)

As we have seen, a depreciating rupee leads to an inflow of foreign currency. This foreign currency inflow helps reduce a country's current account deficit (CAD).

A reduction in CAD is beneficial to any country as it leads to stability in the economy and improves the country's long-term prospects.

The Bottom Line

As you can see, the falling rupee has both positive and negative implications - not just for India but also for the world economy. It is essential to understand these implications so that we can take appropriate measures to mitigate the negative effects and maximize the positive effects.

What remains to be seen is how the Indian government and RBI tackle the situation. Only time will tell if they can make the right decisions and steer the country in the right direction.

We have seen RBI increasing the repo rate, which is a good start, but there is still a long way to go. Let's hope for the best.

I hope this article has been helpful.

Thank you for reading!

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Kushagra Agarwal

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University Maharaja's College


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