The Indian Rupee's Depreciation
Since the Attainment of independence in 1947, the rupee has depreciated against a range of currencies. The Indian Rupee has continued to lose value in recent years.
$1 was equivalent to 16 Indian Rupees in 1990. Since the Indian Rupee'svalue had decreased by 2013, 65 Indian Rupees were required to purchase $1.This indicates that the value of the Indian Rupee relative to the US dollar has significantly declined. A devaluation of the Indian Rupee results in cheaper exports from India but more expensive imports for Indian consumers. The devaluation of the Rupee is terrible news for Indians who must import raw resources like oil and other precious metals in particular.
Inflation and lack of competitiveness: India's relative fall in competitiveness is reflected in the rupee's long-term decline in value. India's inflation rate is higher than that of its international rivals in particular. Indian inflation in November 2020 was 6.93%. As a result, there is comparatively less demand for increasingly expensive Indian goods, which results in a decline in the worth of the Rupee.
The deficit in current accounts: A current account deficit is a result of low competitiveness and high import demand. In other words, India imports more goods and services than it exports. A significant current account surplus typically causes a currency to weaken. This is because more money is leaving the country to pay for imports than is entering to pay for exports. The current account deficit for the first quarter of 2020 was 8.1 billion. In the last quarter of 2021, the deficit was over 6.7%; inQ3 2019, it was only 1.2%. The Economist points out that, despite this, 75% of the deficit reduction is the result of contrived government limits that lower gold imports. As a result, India must endeavor to reduce its underlying trade imbalance by raising exports and improving its competitiveness.
Capital inflows are one way to finance a current account deficit on the financial account. However, India has recently had trouble luring enough long-term capital investment. Recently, a few large corporations stopped accepting foreign direct investments. The Rupee is more under pressure to fall as a result.
Prices of Fuel and Oil
Oil and fuel are net imported into India. These resources must be purchased with cash. Higher oil prices, therefore, damage India's current account and devalue the Indian rupee. For the purchase of fuel, more Indian rupees must be spent.
Impact of the Indian Rupee's depreciation
The pressures of inflation. India is attempting to reduce its high double-digit inflation rate. A drop in the value, however, makes it more difficult to keep inflation under control. Pricing inflation is brought on by devaluation, which raises the price of imports like oil and energy. Devaluation is regarded as an additional simple method of regaining competitiveness. Devaluation may thereby lessen exporters' incentives to improve their long-term competitiveness. Devaluation might also increase domestic consumption. Consumers will switch from importing to domestic producers as exports increase. This may lead to inflation driven by demand.
Devaluations can encourage domestic demand and quick economic expansion. However, the Indian economy may not benefit much from this. Instead of relying just on increasing domestic demand, India's economy should focus on increasing productivity and long-term productive capacity. Investors both domestically and abroad have lost faith as a result of the swift devaluation. Foreign investors will be more hesitant to invest in India due to a history of rapid depreciation. The devaluation and inflationary effects will deter domestic investors as well, including businesses concerned about future oil prices. Investment has decreased, which is detrimental to long-term economic growth.
It is feared that excessive inflation in India may lead to a devaluation, which will fuel further cost growth. As a result, it becomes challenging to break free of this undesirable downward loop of inflation, devaluation, and inflation.
Measures to stop the rupee depreciation
- Supply-side measures to boost competition.
- Minimize reliance on imported using indigenous genius and renewable energy sources.
- Monetarist measures to combat inflator domestic consumption, However, will clash with a sluggish economy and increased employment rate.
- Financial regulations, such as restricting imports of gold to lessen the current account deficit.