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Why does the value of Indian rupee fall?

Why does the value of Indian rupee fall?
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Over the past a few weeks the value of Indian rupee has been plummeting to an all time low against the US dollar Falling of the Indian currency rupee...

Over the past a few weeks the value of Indian rupee has been plummeting to an all time low against the US dollar. Falling of the Indian currency rupee on the day to the level of as nadir as that of 73 vis-a-vis the US Dollar is a burning question on everybody’s mind and there is a big brouhaha and fear about it among the common masses and the policy makers alike. Because consistently falling value of rupee means less purchasing power in the hands of the people as well as the government.

Pablo Picasso once had said, “I would like to live as a poor with lot of money.” In fact, falling purchasing power of rupee is a very weird situation which goes on making the nation financially weaker and weaker and people poorer and poorer. It has also its adverse effect on the prospects of international trade and foreign currency reserves.

That is why the whole nation is overwhelmingly occupied with the concerns of wide socio-familial and politico-economic repercussions of the consistent fall in the value of the rupee which common masses are bound to bear the brunt of.

Ever wondered why the value of rupee slides down so frequently against the American dollar? The depreciation of the Indian rupees to the newer level every day over a couple of months has brought the entire nation to the brink of a huge financial crisis and sullied global image.

In fact, the modus operandi of the determination of value of the Indian Rupee with respect to the US dollar is no way different from the day-to-day experience of witnessing the fluctuations in the prices of various consumer goods and grocery items which we purchase from the neighbouring grocery shops and vegetable market. With the more supply of onion, for example, on some day, its price falls down while with the fall in the supply of onion the common masses are helpless to purchase it at increased price.

How is the exchange rate determined between the Indian rupee and US dollar?
The exchange rate is called as the rate at which the currency of a country is purchased and sold for the currency of a particular foreign country. For example, the rate at which Indian rupee is exchanged for the US dollar is called as the exchange rate of the Indian rupee with that of the US dollar. This rate of exchange of the rupee against the US dollar is determined by the demand and supply of the US dollar in our country.

It is worth knowing that the US dollar is primarily demanded by importers and the Foreign Institutional Investors (FIIs). The US dollar is also demanded for the Foreign Direct Investment (FDI). Foreign Institutional Investors (FIIs) put their money in the stock market of the domestic market while Foreign Direct Investment (FDI) is the capital which is invested in the companies of the domestic country.

The supply or earning of dollar comes mainly from the exports of goods and service and the inflow of remittances by the Non-Resident Indians (NRIs). That is why when the importers demand more of the dollars for the international payments than their supply, the rupee weakens vis-à-vis dollar. Consequently the value of Indian rupee falls down against the US Dollar (US$).

On the contrary, with the fall in the demand for dollars, which is again driven by myriad factors, the value of rupees appreciates and that of dollars decreases. No doubt, besides the fundamental theory of market forces of demand and supply which is also called as the price mechanism, there are more other factors like those of social-political, diplomatic and foreign policies of a country which play substantial role in the determination of the value of Indian rupees against US Dollars -

Price of crude oil
With the fast development and trajectory of high rate of growth of the Indian economy, the demand for petrol and petroleum products has been consistently rising and as a result we require importing more of crude oil annually from various foreign countries. Oil is the second largest fuel after coal. India imports close to 70 per cent of its oil requirements from more than 8 countries. The rest 30 per cent of oil is met through domestic production.

Saudi Arabia and Iran top the list of the countries from where we import most of the crude oil. The prominent oil companies of India require approximately 330 million dollars every day for the import of crude oil and gas and this figure very strikingly shows how much dollars we require every month to purchase it from the various oil producing countries of the world. Thus, increase in the demand for the dollar leads to its appreciation and decrease in the value of the Indian rupees.

Current Account Deficit (CAD)
The current account shows the records of exports and imports of both the material goods and services of a country with the rest of the world. Export and import of goods are totally different from the export and import of services. While goods are tangible and called as merchandise or visible trade, and of which records are available at the ports. Services are non-tangible and called as invisible trade the records of which are not available at the ports.

In fact, the current account deficit is the difference between the visible and invisible exports and visible and invisible imports of a nation with the rest of the world. Shipping, banking, insurance, investment and compensation of employees are main items which make the parts of services that are exported and imported by a nation with the foreign countries.

When our receipts are less than the payments which we make for the purchase of both the goods and services we face the deficit in our current account. As per the latest data, India’s current account deficit has increased to 15.8 billion US $ or 2.4 percent of the GDP. The drastic decrease in the exports has added fuel to troubled waters. They say that unnecessary delay in the clearance and approval of various development proposals too has aggravated the situation and we face the problem of dollar crunch. Consequently we are forced to spend from the foreign exchange reserves for making the payments for all the imports.

What makes the current account deficit more distressing is the ever-increasing import bill of oil and gold. The heavy purchase of gold and crude oil puts heavy pressure on the foreign exchange reserves and finally our current account deficit goes on worsening. That is why there is unprecedented rise in the demand for the dollars which results in the appreciation of its value and finally the value of rupee weakens.

Withdrawal by investors
In the recent past, numerous development projects that were to be started in the country have been withdrawn by the foreign investors due to problems like uncertain delays in the approval of proposals and bottlenecks in the acquisition of land. So many such other projects which could not be approved by the government of India were withdrawn and due to which demand for the dollar abruptly went up.

In case of approvals of these proposals, India would have received huge investments. Consequently, the demand for the Indian rupee and its values would have substantially increased. Because when any foreign company invests in India it needs rupees in exchange of US Dollar for the various transactions in the country.

Increasing import bill of India
In the post reformed milieu of the Indian economy, the import bill has been consistently rising every year. The share of gold import is one of the important factors. The huge rush for gold, brought about by the preference of the people to invest in it, has further worsened and weakened the Indian rupees against the US dollars.

According to the latest survey, the gold import alone makes the 10 per cent of India’s import bill. This is really a surprising fact that 141 tons of gold were imported in April 2013 which increased to 162 tons in the month of May this year. The import of gold has increased to 750 tons in the current year of 2018. This consistent increase in the demand for gold means a rise in the demand for more US dollars in comparison with the rupees. That is why the value of the US dollar appreciates and that of the Indian rupees goes down.

Slump in the Indian economy
In the recent years the overall production in all the three sectors of the Indian economy - primary, secondary and tertiary has recorded very poor growth and consequently the production in them has substantially gone down.
Investors from the foreign countries do not find India a country of lucrative businesses. Decrease in the export, brought about by fall in the production in agriculture, manufacturing and mining, leads to decrease in the earning of dollars. This finally ends up increasing the demand for dollars and raising its value against the Indian currency.

Problem in the equity market
In the critical condition of consistent fall in the value of rupees against the dollars investors prefer to deposit their money in the safe havens of US treasuries, Swiss franc, gold and so on to avoid losses to their investments. This alarming situation of shifting of investment from India to other destinations leads to redeeming of their investments from the country, and consequently the demand for the dollar goes up which brings down the values of rupee.

Increasing fiscal deficit
Generally fiscal deficit shows the dependence of a country on the foreign debt to match the expenses which exceed the revenues of the government. It is the estimated borrowing by the government to meet the increased expenditures in a year. For this the government borrows from the international financial institutions like World Bank and the International Monetary Fund. It is often expressed as the percentage of the GDP.

It shows the excess of expenditure over the government receipts other than borrowings. Greater fiscal deficit means greater borrowings. For the payment of all these foreign debts along with interest accrued to them, we require dollars and this ends up raising the value of dollar vis-à-vis the Indian rupee.

Measures to stop the fall of rupee
The economic phenomenon of a weak rupee is a very big challenge for the Indian economy because it badly affects the economic condition of both the people and the nation. Imports become dearer and that is why the prices of essential commodities increase manifolds. Standard of living of the people falls down. And the nation gets entrapped in a debt trap. The government of India and the Reserve Bank of India (RBI) are responsible for solving the problem of weakness of rupee.

What we urgently require to restrain the rupee from the further sliding is to bring down the imports of the goods and services. More imports simply mean more requirements of the dollars. It means more demand for the dollar and which finally weakens the value of the Indian rupee.

Production in all the sectors needs to be increased. The boost in the production would help us on two fronts. First, we do not need to import more to meet the additional growing demand for the goods and services and secondly, our exports too would get a boost. This would help us in earning the much-needed dollars from the exports to the various countries in the world.

Bringing down the demand for petrol and petroleum products can too play a vital role in strengthening the rupee against dollar because in that condition we would be left with more of dollars which we otherwise spend for their import every year.

So the fluctuations in the value of Indian rupee are more the matter of our life style and social status than anything else. It is also more the matter of the economic health of the country than the fluctuations in the prices of crude oil in the international market. Anyhow, the mechanism of ups and downs in the value of the Indian rupee is matter of sheer economics which needs to be read between the lines.

(Shreeprakash Sharma - The author is Principal, Jawahar Navodaya Vidyalaya, Dinthar Veng, Mamit)

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