Depreciation of Indian Rupee

Depreciation of Indian Rupee

News: The Indian currency declined 2.2% in the Sep-Dec 2021 quarter. This depreciation of currency is due to global funds worth $4 billion having been pulled out of the country’s stock market.This downfall of currency makes the Indian rupee as Asia’s worst-performing currency.

Details:
• Currency depreciation is a fall in the value of a currency in a floating exchange rate system.
• Rupee depreciation means that the rupee has become less valuable with respect to the dollar.
• It means that the rupee is now weaker than what it used to be earlier.
• For example: USD 1 used to equal to Rs. 70, now USD 1 is equal to Rs. 76, implying that the rupee has depreciated relative to the dollar i.e. it takes more rupees to purchase a dollar.

Impact:
• Depreciation in rupee is a double-edged sword for the Reserve Bank of India.
• While a weaker currency may support exports amid a nascent economic recovery from the pandemic.
• It poses risk of imported inflation, and may make it difficult for the central bank to maintain interest rates at a record low for longer.

Reasons:
• India’s trade deficit widened to an all-time high of about $23 billion in November amid higher imports.This growing trade deficit is driven by a rebound in oil prices.
• The strengthening of USD in line with expectations of better growth in the US economy and favorable interest offered by the Federal Reserve (US’ Central bank).The RBI has been continuously buying dollars to build its reserves and prepare itself for any volatility.
• Foreign capital exodus from stocks have led to the benchmark S&P BSE Sensex Index falling by about 10% below an all-time high touched in October 2021.
• When concerns about the omicron virus variant are roiling the global markets.