Depreciation of Indian Rupee has only negative impact on the economy

Mar 6 • General • 1280 Views • 1 Comment on Depreciation of Indian Rupee has only negative impact on the economy

Depreciation Of the Indian Rupee

“The Depreciation of Indian Rupee has only adverse effect on the economy, as is clear from the European financial crisis, which caused the value of Rupee to fall and the value of dollar to rise. This has increased the cost of imports, lowered purchasing power, and led to stagnant economic growth. The depreciation of the Rupee has also spurred inflation and brought about a mismatch in economic growth with Western nations. In addition, the volatility of the Rupee has impacted the entire Asian market, especially India.”
because the government has to pay in rupees a higher amount in terms of import. This increase will result in an increase in fiscal deficit and, consequently, the level of inflation.

Understanding Ruppee Depriciation

Rupee depreciation refers to a fall in the value of the indian currencies, particularly the US dollar (USD). It means that more rupees are required to purchase a single unit of foreign currency.

Negative Impact of Rupee Depriciation

1. Inflammatory Pressure:

One of the most significant impacts of deprivation is inflammation. Since India is heavily dependent on imports such as crude oil, raw materials, and high-end technologies, a weaker rupee makes these imports costlier. The higher import cost results in higher production costs, which are then transferred to the consumers in the form of increased prices, hence inflation.

2. Increases Current Account Deficit

A falling rupee increases the current account deficit, the imbalance between a nation’s imports and exports. Though there is the argument that a falling rupee makes Indian products cheaper for international buyers and thereby increases exports, the gains are usually offset by the increased expense of necessary imports. Furthermore, because India has more imports than exports, a falling rupee exacerbates the trade imbalance and makes the current account deficit rise.

3. Higher Cost of External Debt

India has a considerable amount of external debt, including government and corporate borrowing in foreign currency. As the rupee depreciates, the repayment burden of these loans increases because the same amount of rupees will be needed to pay back this foreign loan.

4. Capital Outflows And Reduced Foreign Investment

Foreign investors tend to withdraw their investments from emerging markets like India where the currency weakens as they fear further devaluations will erode their returns. This capital flight leads to a decline in foreign direct Investments(FDI) and foreign portfolio Investments. (FPI).

5. Adverse Impact on Economic Growth

Depreciation impacts various sectors of the economy, including manufacturing services. The rising cost of imported raw materials increases product expenses, leading to reduced profit margins and lower investments in infrastructure expenses.

6. Reduced Purchasing Power

A weaker rupee leads to a decline in the purchasing power of consumers. Imported goods, foreign education, international travel, and medical treatments abroad become more expensive. This directly affects the middle-class and upper-middle-class segments of society, leading to a reduction in discretionary spending.

Conclusion:

While some may argue that a weaker rupee can benefit exporters, the negative impacts of devaluation far outweigh the positives in the indian context. A strong and stable rupee is crucial for the sustainable growth of the indian economy, and addressing the factors causing depreciation should remain a priority for the economic planners and policymakers.

Follow our education channel on WhatsApp

To get the latest updates connect with our education YouTube channel

Live Economics Class Important For UPSC

« Scholarships Provided by India to Pursue Masters’ Abroad to Indian Students