The Changing Face
Money is not an organic creature but its value keeps changing with the society and its economic conditions. One rupee in 1947 is not the same as one rupee today, both in terms of appearance and purchasing power. The value of a country's currency is linked with its economic conditions and policies.
What does Devaluation mean?
- When the external value of the domestic currency depreciates while the internal value remains the same, such situation is known as the devaluation of the domestic currency.
- The basic difference between the devaluation and depreciation is that, the devaluation is done by the government of the country deliberately while the depreciation take place because of market forces i.e. demand and supply.
The Current Situation:
The rupee has lost nearly 3% of its value since the start of 2018, and it is the second-biggest loser in the BRICS group: Brazil, Russia, India, China, and South Africa. The Russian ruble is the only currency that has lost more value than the rupee in 2018 so far.
The reasons behind the depreciation of the Indian rupee:
Increase in the price of the crude oil:
- As we all know that India produces just 20% crude oil of her requirement and rest is imported from the other countries like Iraq, Saudi Arabia, Iran and other gulf countries. Crude oil is the biggest contributor in the import bill of India.
- As the demand of crude oil is increasing the bill of oil import is also increasing.
- So increase in the demand of crude oil will be followed by the increasing import bill in the form of payment of more dollars to oil exporting countries. Hence the demand of dollar will increase in the Indian market which will reduce the value of Indian rupee.
Beginning of trade war between the USA and China:
- The US President Donald Trump has initiated the trade war with China and European countries and India and these countries also retaliated in the same way.
- So due to this war the price of the imported commodities will go up which will further increase the outflow of dollar from the Indian market.
Increasing Trade Deficit of India:
- A situation, in which the import bill of a country exceeds its export bill, is called trade deficit.
- Indian merchandise trade deficit of $157 billion in 2017-18 was the widest since 2012-13. In the FY 2012-13, the country had reported a merchandise trade deficit of $190 billion. Trade deficit was around was $ 118 billion in the FY 2016.
- As per the law of demand; if the demand of a commodity increases, its price also follows it. In the same way; when more and more foreign currency i.e. dollar goes out of Indian market, its domestic price increases and the price of Indian rupee decreases.
Out flow of Foreign Currency:
- It is worth to mention that when the foreign investors find other attractive markets in the other parts of the world; they pull out their invested money by selling the equity shares. But they demand the most respected currency or easily accepted money i.e. dollar.
- In such a situation the demand of dollar increases which further increases its price.
- This also poses an inflationary risk given that imports are costlier when the currency depreciates.
- This would only add to RBI’s reasons for raising interest rates further
- The central bank has been raising interest rates to match the rising interest rates in the US.
- With more hikes in the offing, the already low credit growth figures could dip further.
- As the costs for hedging currency risks rise and as global interest rates rise, the external borrowing costs for Indian firms will only move up in the coming months.
- This will dampen corporate borrowing and weaken economic activity at a time when domestic banks are not in the best position to raise lending.