Causes For Rupee Incessant Decline Vis-a-Vis Dollar
Currency Depreciation is fall in the value of in the exchange market. For example, one Dollar rate was Rs.58.66 on 26th May, 2014 which has gone up to Rs.74.07 0n 5th Oct. 2018 four years later. This is the depreciation of Rupee and appreciation of Dollar.
Here are reasons for why rates are varying -
1) Dependency on Oil imports - India is the third country importing crude oil in the world, coming
after U.S. and China. India imports 80% of its oil requirements thereby making it more vulnerable
to changes in the international oil market. For example, if crude oil prices increase , our total
imports cost will also increase affecting our current account balance which in turn affects the
currency market.
2) LIRA connection - Turkey, the middle Eastern country is going through a financial crisis now.
Its relations with U.S. are infringes leading to a weak currency - Lira. Its currency has fallen 40%
against U.S. dollar in the first half of 2018. As is often the case, turmoil of a financial crisis in
one country do not stay confined to national borders. Lira crisis has made global market anxious
about its spillover effects. Developing countries tend to be more exposed to crisis like these
making the situation tricky for India.
3) Huge Current Account deficit - India's current account deficit rose to 42% in June 2018 (approx.
$160 Billion). Current account deficit is the difference between Imports and Exports of goods and
services of a country. Huge dependency on crude oil imports and its increasing prices, as
mentioned above, affects current account health, making the deficit larger. An increasing current
account deficit leads to an increase in the demand for Dollars. Since more Dollars are needed to
finance growing deficit, also paying for imports. An increase in the demand for a currency leads
to its appreciation. and if dollar is appreciating against Rupee, it means our currency is
depreciating.
4) U.S. Fed Rates changes - Hike in US fed rates, as was observed four times in 2018, strengthens
Dollar which, in turn, leads to depreciation of Indian Rupee.
5) Global Markets - US and China have been experiencing trade war in 2018. While Ball could fall
on either side, for India, the situation has created a growing unease among Global investors and
Indian economists.
Fall in Indian Rupee will effect -
1) Cost of Oil Imports - As explained above.
2) Increase in Import cost directly effect the corporate market.
3) Inflation - Domestic currency appreciation and Inflation work in the opposite direction. So, a
Depreciation of domestic currency means a potential increase in Inflation.
To ward off an increasing inflation, Central Bank of a country generally increases the interest rates.
Consequently, people are able to borrow less money and spend less keeping inflation in check.
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Here are reasons for why rates are varying -
1) Dependency on Oil imports - India is the third country importing crude oil in the world, coming
after U.S. and China. India imports 80% of its oil requirements thereby making it more vulnerable
to changes in the international oil market. For example, if crude oil prices increase , our total
imports cost will also increase affecting our current account balance which in turn affects the
currency market.
2) LIRA connection - Turkey, the middle Eastern country is going through a financial crisis now.
Its relations with U.S. are infringes leading to a weak currency - Lira. Its currency has fallen 40%
against U.S. dollar in the first half of 2018. As is often the case, turmoil of a financial crisis in
one country do not stay confined to national borders. Lira crisis has made global market anxious
about its spillover effects. Developing countries tend to be more exposed to crisis like these
making the situation tricky for India.
3) Huge Current Account deficit - India's current account deficit rose to 42% in June 2018 (approx.
$160 Billion). Current account deficit is the difference between Imports and Exports of goods and
services of a country. Huge dependency on crude oil imports and its increasing prices, as
mentioned above, affects current account health, making the deficit larger. An increasing current
account deficit leads to an increase in the demand for Dollars. Since more Dollars are needed to
finance growing deficit, also paying for imports. An increase in the demand for a currency leads
to its appreciation. and if dollar is appreciating against Rupee, it means our currency is
depreciating.
4) U.S. Fed Rates changes - Hike in US fed rates, as was observed four times in 2018, strengthens
Dollar which, in turn, leads to depreciation of Indian Rupee.
5) Global Markets - US and China have been experiencing trade war in 2018. While Ball could fall
on either side, for India, the situation has created a growing unease among Global investors and
Indian economists.
Fall in Indian Rupee will effect -
1) Cost of Oil Imports - As explained above.
2) Increase in Import cost directly effect the corporate market.
3) Inflation - Domestic currency appreciation and Inflation work in the opposite direction. So, a
Depreciation of domestic currency means a potential increase in Inflation.
To ward off an increasing inflation, Central Bank of a country generally increases the interest rates.
Consequently, people are able to borrow less money and spend less keeping inflation in check.
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