The Indian rupee depreciated its value to 79.05 rupees against the US dollar on Wednesday which was 79 rupees to a dollar mark earlier. The International Monetary Fund (IMF) believes that the value of the rupee would further depreciate to 94 rupees to a dollar mark by the financial year 29 (FY29)
India is also witnessing a decline of more than $50 billion in its forex reserves since September 3, 2021, and thus had a shortfall from an all-time high of $642 billion to $600 billion. The RBI on the other hand is saying that this decline in the forex reserves of India is largely due to the fall in the dollar value of the assets held as reserves by the RBI. For instance, if some portion of the reserves have Yuan currencies and the value of the Yuan falls, it would automatically decrease the value of forex reserves of India. It should be noted that the aim of the RBI has always been to take back the value of the rupee to its natural state. RBI uses Open Market Operations (OMO) to let the rupee come to its natural state. RBI instructs the state-run banks to sell dollars in order to offer some support to the rupee. Thus by selling them it can control the demand for the rupee because it’s the game of demand and supply only that affects something’s value.
The value of the rupee is totally dependent upon the demand and supply of the currency. When the demand for the rupee increases, there’s an increase in the value of the rupee and vice versa. Mostly central banks determine the supply of currencies, while the demand for currencies is totally dependent upon the supply and demand for goods and services in the country.
In the forex market, the supply of currencies is dependent on the demand for imports and exports. If there’s a heavy demand to export spices or cloth then there is an increase in the foreign reserves for the country and thus the value of the rupee appreciates and if there is an increase in demand for importing oil into the country, then the value of the rupee falls.
The prime cause for its depreciation?
The US Federal Reserve has been attracting foreign investors seeking higher returns by increasing its benchmark interest rates and thus letting them pull away their investing audacity into Indian markets. So this, in turn, has led the value of the rupee to get depreciated and thus, on the other hand, has witnessed an increase in the dollar value. Not only the Indian rupee but other currencies are also witnessing this downfall.
Along with this, India’s current account deficit is expected to increase to a 10-year high of 3.3% GDP in the current financial year. This means that the demand for imports and the global oil price hike would negatively impact the Indian rupee. This deficit could be cushioned only if the foreign investors put some sufficient capital into Indian markets. But they are unlikely to do this as US yields have risen from 0.5% in the mid-2020s to 3% now.
Also, a significant reason for rupee depreciation in India is the consistently higher GDP inflation in India. Higher inflation shows that the RBI has been making dollars at a much faster rate than the US Federal Reserve.
With the follow-up of tighter monetary policies across the globe and thus raising the interest rates, there are high chances for the occurrence of global economic repression or global economic depression.
India is required to manufacture domestic products at a much faster pace and promote more industrialization and especially the policy of ‘Aatma Nirbhar Bharat’ needs to come into play.
Written by – Riya Sirohi