- Since the beginning of 2018 rupee has fallen by about 6 per cent in value against the US dollar hovering past ₹70 to a dollar.
What is meant by Depreciation of Rupee?
- Rupee is said have depreciated if we end up paying ‘more’ rupee to get the same amount of dollars.
- This happens in situations where the demand for US dollar increases in India and as a result we pay ‘more’ rupee to get the same amount of ‘dollars’
Reasons behind rupee depreciating
Rising crude prices in global markets:
- As a result of re-imposition of sanctions on Iran by USA, the oil supply has taken a hit increasing the oil prices.
- US oil rose above $70 a barrel for the first time since November 2014.
- Since India imports nearly 80 per cent of its oil, the rupee has depreciated.
Strengthening of US economy as a result of protectionist measures has pulled back money from emerging markets.
Impact of depreciation:
Impact on Trade:
- As a result of paying ‘more’ rupee to same amount of dollars, we end up paying more for our imports- Imports are costlier.
- On the other hand, we end up getting ‘more’ rupee for same amount of dollars when we export something- Exports get cheaper.
Impact on CAD:
- A currency of an economy weakens when it owes more money in foreign exchange than what it earns. This is called the current account deficit.
- As a result of high import bills, we are witnessing high trade deficit and thus high CAD.
- India’s current account deficit rose to 1.9 per cent in the quarter to March 2018. It was 0.6 per cent in the same period last year.
Impact on Inflation
- India imports nearly 80 per cent of the crude oil requirements.
- As a result of high import bills on account of crude oil imports, we end up pay more for fuel domestically.
- Paying more for fuel implies high fuel cost, transportation cost etc.
- This drives high inflation throughout the economy.
Impact on GDP growth
- There is no correlation between GDP growth and depreciating currency.
- Depreciating rupee affects GDP in two ways:
- Costlier inputs because of high inflation and the subsequent increase in the prices of finished goods should have a positive impact on GDP.
- However costlier outputs mean decrease in demand has a negative impact on GDP.
Impact on individuals
- Higher prices of goods and services.
- Costlier petrol and other fuel.
- High cost of education, health abroad and outbound tourism.
- Export-oriented industries may also create more jobs.