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Dear Students, New Batches for IAS and MPPSC starting from 2nd August 2025
Dear Students, New Batches for IAS and MPPSC starting from 2nd August 2025
Rupee Depreciation
Context:
The Indian rupee recently experienced a sharp decline in value against the US dollar after a period of relative stability.
What is Devaluation?
Devaluation refers to the deliberate downward adjustment of a country’s currency value against foreign currencies, typically carried out by the central bank. It is used to enhance export competitiveness and reduce trade deficits but may increase the cost of imports and domestic inflation.
What is Depreciation of Rupee?
Depreciation of the rupee occurs when its value declines relative to foreign currencies in the open market. Unlike devaluation, which is a policy-driven move, depreciation is influenced by market forces such as supply-demand dynamics, capital flows, and global economic conditions.
Reasons Behind the Recent Decline in Rupee Value:
Internal Factors:
Rising Inflation: Higher domestic prices reduced the real value of the rupee. And inflation-driven production costs made Indian exports less competitive.
Widening Trade Deficit: Increased imports, particularly of crude oil, led to higher demand for foreign currencies.
Fiscal Deficit: Persistent fiscal imbalances put downward pressure on the rupee.
Policy Ambiguity: Frequent shifts in RBI’s exchange rate policy led to market uncertainty.
External Factors:
Capital Outflows: Foreign investors withdrew funds amid global economic uncertainties and rising US interest rates.
Geopolitical Tensions: Conflicts like the Russia-Ukraine war affected global energy prices, increasing India’s import bill.
Global Economic Slowdown: Lower global demand for exports added to the rupee’s woes.
US Dollar Strength: Aggressive rate hikes by the US Federal Reserve strengthened the dollar, making the rupee weaker.
Consequences of Falling Rupee:
Increased Import Costs: The weakening rupee makes crude oil, electronics, and raw materials costlier, worsening India’s current account deficit.
Inflationary Pressures: Rising import costs elevate domestic inflation as businesses pass on increased input costs to consumers.
Export Competitiveness: While cheaper rupee benefits exports initially, high input costs due to inflation negate these advantages over time.
Capital Flight: A depreciated rupee reduces investor confidence, prompting foreign investors to withdraw capital from Indian markets.
Impact on Borrowing: External debt denominated in foreign currencies becomes more expensive, increasing repayment burdens on the government and businesses.
Measures to Restore the Value of Rupee
Monetary Policy Measures:
Foreign Exchange Intervention: RBI can sell forex reserves in the market to manage demand-supply imbalances and stabilize the rupee.
Interest Rate Hikes: Higher repo rates make Indian investments attractive, encouraging foreign inflows and strengthening the rupee.
Currency Swap Agreements: Bilateral agreements with other countries can reduce reliance on the dollar and stabilize foreign currency flows.
Fiscal Policy Measures
Reducing Import Dependency: Enhance domestic production of high-demand imported goods, such as crude oil substitutes, to lower import bills.
Boosting Exports: Offer incentives and subsidies to exporters to increase foreign currency earnings and improve the trade balance.
Infrastructure Development: Develop efficient logistics and supply chains to reduce production costs, enhancing overall competitiveness.
Encouraging Foreign Investments: Implement policies to attract long-term FDI, creating a stable environment for investors.
Way Ahead:
Comprehensive Policy Framework: Introduce a well-defined and stable exchange rate policy to reduce volatility and build investor confidence.
Strengthening Domestic Production: Support programs like ‘Make in India’ to reduce reliance on imports and improve self-reliance.
Managing Inflation: Use targeted fiscal and monetary tools to maintain price stability and control inflation.
Diversified Forex Reserves: Accumulate a mix of currencies in forex reserves to minimize dependence on the US dollar and reduce vulnerabilities.
Conclusion:
A stable rupee is vital for economic growth, fiscal stability, and global competitiveness. While immediate interventions are essential, long-term strategies focusing on domestic production, export growth, and robust policy frameworks will ensure sustained economic resilience.
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