IMPACT OF RUPEE DEPRECIATION

RUPEE DEPRECIATION 

Generally foreign exchange rates are determined by the forces of demand and supply of currencies available  in the global or foreign exchange market. The exchange rate refers to the rate at which domestic currency (eg.Indian Rupee) is exchanged for foreign currency (eg US dollar)..In other words exchange rate is the external purchasing power of domestic currency. It is  to be noted here that in India foreign exchange with its limited availability was treated like a controlled precious commodity. Foreign exchange control was administered in the country under  different rules and regulations like Defence of India Rules  September 3,1939,Foreign Exchange Regulation Act 1947which was replaced by Foreign Exchange Regulation Act 1973.Further Foreign exchange Regulation Act FERA was replaced byFEMA or Foreign Exchange Management Act in 1999 witth a view to liberalise Indian economy and promote foreign investment,which came into force from June 1st  2000.Theoretically economists mainly classified different methods of determining exchange rates - from fixed, stable or pegged exchange rate to flexible  or floating exchange rate. Currently we are following  managed floating where the demand for and supply of foreign exchange determine the rate of exchange,and periodical volatility in exchange rate is corrected by the timely  intervention of Reserve Bank of India that makes it "managed floating " exchange rate. 

After independence for India US dollar continued to remain the most powerful currency or hardcurrency.If rupee falls even by one paise to all time low against US dollar it leads to  foreign investors selling their rupee holding and there exist strong demand for dollar. RBI  has been intervening to support rupee leading to a decline in foreign exchange reserves. As far as its  rate of exchange  with  Indian Rupee is concerned one dollar was equiialent 3.30  rupees at the  time of independence which is marching towards rupees 85 in December 2024. In 1947 one  US dollar was equivalent to Indian rupees 3.30  which increased to rupees 7.50 in 1966 ,8.39 in 1975, but reduced to 6,61 in 1980 afterwards increased to 17.01 in 1990,44.31in 2000,43.50 in 2005,46.02 in 2010,54.78 in 2013,67.63 in 2016,70.64 in 2018 74.31 in 2020 ,75.45 in 2021,81.62 in 2022 and 84.31 as on November 25 2024 ,84.8575 on December 2024.

The current struggle of Indian Rupee against US dollar affects economy and many people  who are engaged in import trade, travel,tourism,student emigrants themselves. Reasons attributed depreciation of rupee are many. Most important reason is our persistent trade deficit especially in merchandise trade where imports is far higher than exports. Since export earnings are less more dollars are required to meet rising import costs.Another reason is Current Account Deficit (CAD) a situation where the country spends more foreign exchange abroad than it recieves from abroad. Significantly India's CAD is expected to remain stable and manageable for both Fy 2025 and Fy 2026.Broadly the strategy to compact include measures like import substitution, export promotion, Viable and sound monetary and fiscal policies, adopting appropriate structural policies and finally maintaining exchange rate stability .Similarly if India's inflation is higher that that of the United States, it depreciates the value of Indian rupee further. Interest rate differentials also impact exchange rate.  Foreign Direct investment Inflows and outflows foreign Portfolio investment, foreign institutional investment,external borrowings of the Government ,external commercial borrowings and external debt servicing etc do impact value of domestic currency.As per recent Data most of the following countries currencies including that of Brazil,Mexico,  Indonesia,  Philippines, Thailand,  South Korea,Malaysia, Japan and China also witnessed higher currency  exchange depreciation than that of India. Moreover foreign exchange reserves of India declined from $704.9 billion in September to 27,2024 to $590.8 in November 

REMEDIAL MEASURES 

Measures suggested to check the depreciation of  rupee include boosting of exports by investing in export oriented sectors, investment in gold, utilisation of  e rupee dollar arbitrage opportunities. Suitable trade policies with tariff, trade agreements and capital controls.Interest rate differentials between countries can also affect depreciation.According to Reuters opinion survey bearish bets on the rupee climbed to a two year high.RBI has been regularly selling dollars in the spot market to support rupee as it has consistently hit new all time lows.RBIs forex swaps is intended to avoid directly impacting cash in the system as it supports the rupee.Moreover arbitrage between the offshore and onshore markets have inverted the dollar/rupee forward premiums curve.

DEDOLARISATION 

Dedolarisation is another strategic method recommended to  reduce excessive dependence on US dollar .Dedolarisation refers to reducing the dominance of US dollar in the global market transactions. It is a process whereby  buying  and selling of goods and services in the global market is made through the use of local currencies or currencies other than US$ .Since US dollar still remains as the world's largest reserve currency,with  disproportionately  large amount of clout and influences it can exert on countries vulnerable both in trade and investment. In India dollar reserves come largely from infusion foreign investment comprising of foreign direct investment (FDI) foreign portfolio investment (FPI) and foreign institutional investment (FII).It has been observed that tightening of  US  monetary policy may adversely impact India by capital flight or capital outflows. At the same time India's  exports  to US have shown consistent upward trend with compound growth rate of 10.3% over the last 30 years.In Financial year 2023-24 US alone accounted for 18 % of our total exports mainly comprising of pharmaceuticals,pearls and precious stones, telecom instruments,ready made garments etc.It may be noted that  dollars' continued supremacy in global financial  and currency market as a link currency fulfilling the functions of "store of value" and "medium of exchange"is likely to stay  in the international economy unless drastic and reveloutionary changes take place with active involvement of atleast most of the countries across continents to reform international monetary system. BRICS + countries have been making incremental measures towards Dedolarisation .In any case  finding suitable and appropriate system and mechanism to operate transactions under the proposed  new system will take time and the transition may prove to be much  stressful if not painful. 

CONCLUSION 

The Monetary Authority with its new Governor has to  tackle mainly three problems-attaining economic growth, controlling both inflation and depreciation of rupee. Exchange rate  depreciation can be made fruitful provided import content of our exports are less and there is increasing demand for our export items particularly labour intensive products abroad. US dollar has become strong further because President Trump has proposed  both tax cuts and increase in Tariffs,crackdown on illegal emigration . Withdrawal of MFN status India even by European country is a set back it should be addressed strategically so that other countries are not following the same tactics against India. The fall in rupee has been stabilised through frequent intervention in the foreign exchange market by RBI largely by supplying dollars from its reserves and at times rarely purchasing dollars to maintain exchange rate stability. Ofcourse India's robust and buffer stock foreign exchange reserves are really a blessing in maintaining foreign exchange stability. In addition RBI  is also cautioning Commercial banks against loss of foreign exchange in their operations.But our foreign exchange reserves also declined from $704.9 billion in September  27.2024 to $654.9 on December 6 2024.In short proper  balancing and coordination between growth, price stability and foreign exchange stability  objectives require appropriate mix of policies,  instruments and measures to enable desired outcomes.However emerging geopolitical conflicts, supply disruptions,climate change, and tensions are  likely to adversely impact desired outcomes.