17 April, 2020
9 Min Read
Analysis of Depreciating Rupee
Part of: GS-II- Labour reforms (PT-MAINS-PERSONALITY TEST)
The value of the Indian rupee against dollar has significantly declined to the level of Rs 76 further impacted by COVID-19. Fall in the rupee has become a matter of concern as it can slow down the economic growth, corporate earnings, and can lead to market volatility. Currency depreciation for any developing economy could be a major stumbling block in its growth. It calls for measures to encourage exports and strengthen the manufacturing sector to reduce import overdependence.
Government has announced several steps including steps to curb the import of non-essential goods and encourage the export of domestic goods, which will help in addressing the country’s burgeoning current account deficit. Other steps such as removing restrictions on foreign portfolio investments and encouraging Indian borrowers to issue rupee-denominated ‘masala bonds’ have also been announced to facilitate the inflow of dollars and to de-risk the economy from fluctuations in the exchange rate.
Devaluation of currencies around the world: the dollar has appreciated sharply against most of the other currencies in the world. For instance, it has moved up against both the euro and the pound. Developing countries have suffered the loss of portfolio investment because of their relatively unstable political and economic conditions. Historically, devaluation was used as a tool to curb the balance of payments deficit. The currency was devalued to decrease the price of exports by making them more competitive. Also, the imports in the country became more expensive and its volume got reduced in the economy.
Causes for the Decline
Valuation of Rupee
Any currency, say the rupee, can be overvalued or undervalued. Overvaluation of the currency means that its price in terms of foreign currencies is too high, compared to what it would be with a more appropriate exchange rate. This makes the exports expensive in foreign markets and the imports cheap in the home market. Undervaluation of the currency means the opposite. Its price in terms of foreign currencies is too low so that it discriminates against imports and in favour of exports.
How does the depreciating rupee impact the economy?
NOTE (PT SHOT):
Landed cost is the total cost of a commodity or a product when it lands at the ports of the country importing the commodity/product from another country. It includes the manufacturing cost of the product, all transportation costs, customs, duties, taxes, currency conversion, crating, handling charges and payments etc.
A Brief History of Rupee
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