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Currency Depreciation
Currency depreciation means a slide in the value of currency in terms of foreign currencies. In terms of exchange, it means that the foreign currency becomes costlier vis-à-vis the domestic currencies. For example, to understand this more clearly, consider the US Dollar as any other commodity placed in the market. Let us assume that at any point of time, say August 2012, the value of the Dollar reached Rs. 55. This means the value of the Rupee has slid by Rs 11 vis-à-vis the Dollar.
Devaluation Versus Depreciation
Often, there is confusion between the two terms. Devaluation is the official lowering of a country’s currency value within a fixed exchange rate system. It’s a government action, setting a new fixed rate against a foreign currency. In contrast, depreciation is a market-driven decrease in a currency’s value, not triggered by government policy.
Devaluation of the RUPEE: Causes
The value of any currency in the international market is decided by the forces in the market. Simply speaking, if the demand for any good or service is higher relative to its supply, it becomes dearer or costly. Exactly the same holds well for inter-nation currencies as well. Exchange rates are expressed as a comparison of two currencies, and it is always relative.
International Economy Causes
The role of speculation, the under-performing international economy, Euro-zone crisis, sovereign defaults, etc., have raised profound uncertainty in the international market. In such circumstances, investors feel it is safe to buy dollars rather than any alternative assets. This has increased the demand for dollars in the international economy, and the rupee, along with many currencies, it is argued, suffered on account of this.
Flight Of Foreign Investment
Foreign institutional investments (FII) are a prominent source of demand for the rupee. It is a well-known fact that the Indian stock market is dominated by overseas investors. When the economy is performing well and the stock market is performing better than other countries, overseas investors will become big investors here. To invest here, they require rupees. This will increase the demand for rupee and will result in higher value for Rupee. On the other hand, when these investors are pulling money out of the Indian stock market, the Rupee will be depreciated.
Constraints Among Market Forces
Inelastic import bill It is said that there are invisible hands of market forces which tend to take corrective actions in case of anamoly. The same is theoretically true for an international currency that depreciates. In such cases, when currency depreciates, the import becomes costlier while the export becomes cheaper.
Currency Account Deficit
India’s current account deficit is more than the expected level, which means the country needs to buy more foreign currency to pay out bills. More demand for foreign currency will reduce the value of a country’s currency.
Impact Of Rupee Depreciation
IMPORTS: It drives up import prices.
EXPORTS: It makes exports more profitable.
FOREIGN DEBTS: It increases the repayment of foreign debts of the Indian government.
SERVICING: It adds to the Indian government’s debt servicing costs.
CURRENCY DEPRECIATION: INDIAN RESPECT
Reasons For Rupee Depreciation:-
Gold And Oil Imports
The excessive dependence of India on importing gold from African countries and oil products from OPEC countries is reducing the revenue the government generates from exports. Consequently, in the present economic scenario today, 1 dinar is equivalent to almost 130 rupees.
Lack Of Energy Resources
This is a supplementary point for the previous one in some regard. Too much import of household cooking gas is putting too much pressure on Indian economy as supply connection for cooking gas is rampantly increasing as the way population is. Apart from it giving subsidies to to each gas is putting too much pressure on the economy.
Decreasing Fiscal Deficit
When government spending surpasses revenue, the shortfall is financed through borrowing, known as the fiscal deficit. Factors such as heavy reliance on gold and oil imports, limited energy resources, and subsidies on cooking gas all contribute to widening this fiscal deficit.
Decreasing Budget Deficit
A financial situation that occurs when an entity has more money going out than coming in. The term “budget deficit” is most commonly used to refer to government spending rather than business or individual spending. This is called budget deficit.
In the wake of the above three points, the value of the rupee is decreasing day by day and is, therefore, putting a severe threat to our economy.
Poor Performance: Share Market
One of the major sources of dollar flows into India is the share market. Foreign financial investors invest in the shares of Indian companies and mutual funds, bringing in large amounts of dollars in billions to earn comparatively at higher rates. These are held in reserve by the banks, who in turn sell to Indians to meet their dollar needs. When the share market performs poorly and indexes fall, foreign investors sell their share holdings to avoid further losses. They convert their rupees into dollars and withdraw them from India for use elsewhere. As a result, they drastically reduce the dollar supply in a short period, causing the value of the dollar to rise in terms of rupees required to buy it.
Measures To Strengthen The Rupee
Fii Measures
Opening of a further US $ 5 billion worth of government securities to registered foreign institutional investors.
Repaying loans
Making policies easier for Indian businessman to repay their rupee loans and allowing new classes of non-resident investors to buy government bonds.
Effect Of These Measures
Allowance By Central Bank
The central bank will now allow the sale of government bonds to new types of non-resident investors sovereign wealth funds, insurance funds and central banks.
Help To Manufactures
In India, manufacturers and businessmen can now borrow more overseas funds, up to $40 billion, to repay rupee loans taken for capital expenditure, an increase from the previous limit of $30 billion.
Anomalies Of These Steps
Central Bank Intervention
These measures would make borrowing and investing more attractive, but the central bank intervention is still low
Broadening Investor’s Base
Broadening the investor’s base will have a minimum effect on a day-to-day basis but not meaningfully in the long term
Response Of Market Analysts
The measures taken by the government in the wake of monetary policies were described by market analysts as insufficient as it lacked broader structural reform.
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CURRENCY DEPRECIATION : INDIAN RUPEE
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« Depreciation of Indian Rupee has only negative impact on the economy
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Sunny Kumar
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