The Indian Rupee fell for the sixth straight session and depreciated to a nine-month low of 75.4 against the USD, it is one of the biggest losers among the emerging market currencies.
GS-III: Indian Economy (Macroeconomics, Monetary Policy, Fiscal Policy, Capital Market)
Dimensions of the Article:
- Understanding Currency Depreciation and the Factors
- Reasons for the Decline of the rupee
- Intervention to Control Depreciation of the Rupee
Understanding Currency Depreciation and the Factors
Currency depreciation is a fall in the value of a currency in a floating exchange rate system where market forces (based on demand and supply of a currency) determine the value of a currency.
Some of the factors that influence the value of a currency are:
- Interest rates
- Trade deficit
- Macroeconomic policies
- Equity market
Currency depreciation increases a country’s export activity as its products and services become cheaper to buy.
Reasons for the Decline of the rupee
- Rising Covid-19 cases have emerged as a key concern and as several states are now considering more stringent lockdown measures, market participants are concerned over delay in the recovery of the economy, which was hit hard in 2020-21 by the pandemic.
- The strengthening of USD in line with expectations of better growth in the US economy, has also put pressure on the Rupee.
- RBI’s announcement of Government Securities Acquisition Programme (G-SAP) programme to infuse liquidity has also put additional pressure on the Rupee. – This is being read as a sort of quantitative easing policy the global central banks had followed, in which the RBI will support the government’s elevated borrowing programme through infusion of liquidity.
- Another factor that is putting additional pressure is the decreasing support of the Foreign Portfolio Investors (FPIs), who pumped huge inflows into Indian equity markets between October 2020 and February 2021.
Impact of Depreciating Rupee
- Depreciating rupee will adversely affect those who are: Importing from outside, seeking foreign education, travelling abroad, investing abroad, seeking medical treatment abroad etc.
- However, those who are exporting from India, receiving remittances from Non-Resident Indians (NRI) and Foreigners who travel to India will be benefitted.
Intervention to Control Depreciation of the Rupee
- The RBI intervenes in the currency market to support the rupee as a weak domestic unit can increase a country’s import bill.
- The RBI can intervene directly in the currency market by buying and selling dollars.
- If the RBI wishes to increase the rupee value, then it can sell dollars and when it needs to bring down rupee value, it can buy dollars.
- The RBI can also influence the value of rupee by the way of monetary policy.
- RBI can adjust the repo rate (the rate at which RBI lends to banks) and the liquidity ratio (the portion of money banks are required to invest in government bonds) to control rupee.
-Source: The Hindu