The price of any currency is decided on the basis of the demand and supply of that currency in the market. When the demand for a currency decreases and the supply increases, its price starts decreasing.
In the last week of December 2024, the Indian rupee fell to the level of 85.81 against the US dollar. This was the lowest level ever for the rupee and this fall gave rise to a new concern in the Indian currency market.
The rupee fell by about 3% in 2024, which further clarifies the trend of weakening of the rupee that has been going on continuously for the last few years. This weakness of the rupee has become a big challenge for the Indian economy, and its effect is directly falling on every common Indian.
The fall of the rupee is a complex and multi-factor problem, which is being affected by many reasons not only at the domestic but also at the global level. In this report, we will discuss those reasons in detail and understand what are the major reasons behind the fall of the rupee and how it can affect the Indian economy.
First of all, we have to understand that the price of any currency is determined on the basis of the demand and supply of that currency in the market. When the demand for a currency decreases and the supply is more, its price starts decreasing. The same situation is happening between the Indian rupee and the US dollar. When the demand for the Indian rupee decreases, the value of the rupee starts falling and this is what we are seeing.
Question – What are the main reasons for the weakness of the rupee?
Answer – To understand the fall of the rupee, we have to analyze various economic and global factors affecting it.
1. Exodus of foreign investorsÂ
A major reason for the fall of the rupee is the withdrawal of money by foreign investors from India. Actually, global investors are always looking for safe investment options, and when central banks around the world change their policies, it changes the priorities of investors.
After Covid-19, inflation increased worldwide, causing central banks to raise interest rates. Due to high interest rates in developed countries like the US, investors’ attention has now shifted more towards the markets there. That is, due to the increase in interest rates in the US, it became more profitable for foreign investors to invest in US bonds and other investment options than investing in the Indian market. As a result, investors withdrew their capital from India, which increased the supply of rupees, and this resulted in the depreciation of the rupee.
2. High inflation in India
Inflation in India has been consistently high. The main reason for this is the relatively loose monetary policy of the Reserve Bank of India (RBI). When inflation is high in a country, the value of its currency falls as commodities become expensive, and as a result the purchasing power of that country’s currency weakens.
In India, prices of especially food and energy commodities are constantly rising, which is further increasing inflation. At the same time, the Reserve Bank of India has not raised interest rates much to deal with these inflationary pressures, which has further weakened the rupee. Unlike the US Federal Reserve, which adopts strict policies to control inflation, the RBI’s policies are more flexible, which causes the rupee to weaken.
3. India’s import dependence
India is a country that imports a lot of crude oil, gold and other expensive commodities. Crude oil is a huge requirement for India, as the country consumes a lot of energy. When the price of crude oil rises in the international market, India needs more dollars to buy oil. This increases the demand for dollars and puts pressure on the value of the rupee. The same is the case with gold, which Indians traditionally love. When the import of these commodities increases, the supply of dollars increases, but the supply of rupees remains stable, causing the rupee to fall.
4. RBI intervention
The Reserve Bank of India uses its dollar reserves to control the fall of the rupee, so that the supply of dollars in the foreign exchange market can increase. This is done at a time when the value of the rupee starts falling too fast, so that stability is maintained in the market. Although the RBI has used its reserves to increase the supply of dollars, there has been no major improvement in the weakness of the rupee. As a result, Indian foreign exchange reserves have declined, falling to $640 billion in the last week of December from over $700 billion in September.
5. Commercial deficit and export weakness
India’s commercial deficit (Current Account Deficit) is continuously increasing, which means that India’s imports are more than its exports. When the country’s exports decline instead of increasing, foreign exchange receipts fall, and the rupee weakens due to increased demand for foreign currency. The pressure on the rupee increases due to volatility in Indian exports and the decline in the global competitiveness of Indian products.
6. Global uncertainties and strengthening of the US dollar
Global uncertainties are also a major reason for the position of the Indian rupee against the US dollar at the international level. Due to the changes taking place in the global economy, the demand for the dollar has increased continuously. Investors always have confidence in the US, which is the world’s largest and strongest economy, and due to this the dollar becomes strong. The weakness of the rupee against the dollar has also been increased by the global economic environment.
Question – What will be the effect of the fall of the rupee on the Indian economy?
Answer – In response to this question, economist and professor of Patna University Sunita Srivastava says that the weakness of the rupee has a deep impact on the Indian economy. First of all, inflation can increase even more due to the increase in the cost of imports, which can make the life of the common man expensive. Apart from this, if the weakness of the rupee continues, then foreign investors can withdraw even more money, which can increase volatility in the Indian market.
The biggest challenge for India will be to control the fall of the rupee and regain the confidence of foreign investors. For this, the Reserve Bank of India may need to change its monetary policy and take effective steps to stabilize the position of the rupee.
Question- How should the rupee be prevented from weakening against the dollar?
Answer- In response to this question, economist Sunita Srivastava said that the first step is that the Reserve Bank of India (RBI) will have to tighten its monetary policy. The increase in interest rates will increase investor confidence and foreign capital will come to India, which will increase the demand for the rupee. Along with this, the Government of India will have to try to increase exports and control imports. If India is able to increase its exports, then foreign exchange will be received, which will strengthen the rupee.
India needs favorable policies to attract foreign investment. This will increase investment in the Indian market and will help in the stability of the rupee. Apart from this, to maintain the value of the rupee, the Reserve Bank of India will have to intervene slowly when required, but the market will also have to be given a chance to stabilize according to its own.
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