Copyright infringement not intended

Picture Courtesy: https://appreciatewealth.com/blog/usd-vs-inr-why-indian-rupee-falling-against-us-dollar

Context:

The value of the Indian rupee in relation to the US dollar has surpassed 85. 

Why is the Indian rupee falling against the US dollar?

Several factors are contributing to the Indian rupee's weakness against the US dollar, the most important of which are currency market demand and supply dynamics.

India imports more than it exports, which drives up demand for US dollars. This leads to a weaker rupee because more rupees are required to purchase dollars.

When foreign investors withdraw money from India due to factors such as higher inflation or better returns in the United States, demand for the rupee falls, leading to the currency to depreciate.

Political factors such as tariffs and trade restrictions can have a significant impact on currency demand. For example, if the United States imposes high tariffs on Indian goods, demand for Indian goods—and thus Indian rupees—decreases, causing the rupee to fall.

Inflation reduces the purchasing power of a currency. If inflation in India exceeds that in the United States, it raises the cost of Indian goods and services, reducing global demand, which reduces demand for the rupee, leading to it devaluing against the dollar.

Effect of a weakening rupee on Indian economy

The depreciation requires the government to increase subsidies for goods such as energy and fertilizer to protect citizens from inflation. While this benefits consumers, it increases the budget deficit and slows economic growth.

As the rupee falls, import-dependent industries such as electronics, automobiles, and pharmaceuticals face higher production costs, which lowers profit margins, possibly leading to higher consumer prices or even production cuts. As a result, both inflation and unemployment increase.

As the currency depreciates, interest rates on foreign loans rise, it increases EMIs and makes it more difficult for businesses to get new credit. This slowdown has the potential to reduce capital expenditure and push back infrastructure projects.

Way Forward

Economists recommend increasing exports, reducing dependence on oil imports, and increasing domestic production in strategic sectors to reduce the trade deficit and strengthen the rupee.

Must Read Articles: 

STABILITY OF INDIAN RUPEE

Source: 

Indian Express