INR vs. USD: Why the Rupee Keeps Crashing & Understanding the Factors Behind Its Fall, How It Affects You
The Indian Rupee had lost significantly against the US Dollar during the last couple of years. Most people ask, Why is the rupee still falling and what are the main reasons? In spite of what people feel global changes might have caused such economic instability, several factors come into play inside as well as outside to play their respective parts in currency fluctuations.
In this post, we discussed some critical reasons why rupee falls and its subsequent weakening and what actually happens to common man’s routine life.
US Dollar Strength Live.
Among the most significant currency pairs in the global finance landscape is the Indian Rupee and the US Dollar. Most emerging market currencies, including the rupee, depreciate as the USD strengthens. The primary reason for this is that the US Dollar has been the reserve currency of choice for most central banks around the world and, thus a strengthening dollar automatically translates to weakness in other currencies.
For instance, the US Federal Reserve increases the interest rates to check the inflation level, and thus the dollar becomes attractive to foreign investors. So, the capital reaches back to the US and drains from the developing markets, such as India, therefore leaving less foreign exchange in the market, which further brings down the rupee.
Effect of Trade Deficit
A trade deficit arises when the difference between imports and exports, in terms of goods and services, is predominantly on the excess side of imported goods and services. For nearly two decades, India had a chronic deficit in its terms of trade; it was the third largest oil importer in the world, and the slightest raise in global prices assumes a fabulous proportion in Indian economy.
With this, as the trade deficit of the country grows larger and more dollars out or taken out of the country than brought into it for offsetting exchange, the rupee is weakened.
Now, inflation is another important determinant of rupees and it is now becoming another important determinant to have an upward move on the prices of rupees. Over the past years, India fought back against a more-than-expected level of inflatory numbers.
This further leads to lesser demand for the rupee in the foreign exchange markets, and hence the rupee gets depreciated. The inflation rates are compared with other countries, and if the inflation of India is more than its trade partners, then the rupee goes down.
Global Geopolitical Tensions and Economic Uncertainty
The other crucial reason why rupee is devaluing is the uncertainty and political tension in the global economies. US Dollar is a safe haven currency and investors tend to shift capital to such safe havens if any major economy is experiencing turbulence or turmoil in any region.
It includes political unrest in the Middle East or slowdowns in other economies that create an investment pattern shift, thereby increasing capital outflow from the emerging economies of India, making the rupee depreciate.
Interest Rates and Capital Outflows
Another factor that determines the value of the rupee is monetary policy implemented by the Reserve Bank of India. Increased interest rates are often imposed to curb inflation or stabilize the economy. The cost of borrowing may be higher and thus may attract foreign investors seeking more impressive returns on investments. However, this can discourage domestic spending, slow down the economic growth rate, and hardly contribute to a favorable result in terms of inflation.
On the contrary, if the interest rates remain lower in India than that other countries, particularly the United States, then there is a greater chance of capital outflow. This would mean the foreign investor might withdraw the investments from Indian markets and deposit elsewhere in a country providing a better return. This trend decreases the demand for rupee, thus making it weak compared with the dollar.
How It Affects You: The Common Man’s Perspective
This influences the common man in several ways. Here is how it impacts you:
1. Import Price Inflation: Rupee decline attracts the rise in the cost of importing products. It may be for fuel, electronics goods, even food products to import. Say for instance an increase in the price of crude oil, thereby higher price for petrol and diesel in India leads to a transport cost.
2. The rupee falls, causing inflation to shoot through the roof. When the rupee is a weak rupee, big-ticket things in life go up. And hence, thereby and therefor, your buying power is always impacted seeing how expensive normal, everyday stuff and services in life have become.
3. Investment: The sharp fall of rupee can cause investments to India. In case the rupee falls, its international investors shall have a lower return because the Indian rupee stands weak. Then it may happen to the line of stock exchange.
4. Travel and Tuition Fees-If you wanted to travel aboard or send the children for tuitions aboard in foreign countries-the fall in Rupee means increase in cost from your side-because you shall require more numbers of rupee to purchase equivalent foreign currency-to spend on that travel or paid tuition fees End.
5. Cost of External Debt: With rupee depreciation, it costs the Indian government and corporates with debt in foreign-denominated currency a higher amount of rupees to service their debt. This raises future fiscal burden and costs of borrowing.
Conclusion
Rupee depreciation against the dollar is not a single factor but interplay of various global and domestic factors. From the strength of the US dollar and trade deficits to inflation and capital outflows, several factors affect the value of rupee. For the layperson, these fluctuations in currency value have palpable impacts on everything from expenses paid daily to investment returns. These are in a way easy to understand in order to see things in a proper perspective.
