WHY IS THE INDIAN RUPEE DEPRECIATING?

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Indian rupee has been one of the worst performing major emerging market currency in 2018, and the worst in Asia-Pacific region. For the first time in the history of the world’s largest democracy, the currency has fallen into such low historical point. Let us examine into the possible reasons for such depreciation of the rupees.


v  The dollar is the only international currency through which about 80 percent of the international trade and investments are being conducted. The Indian rupees,  being a non floating currency has little to say in determining the market value of the dollar.
v  India imports around 80 percent of its oil from the OPEC countries. The Indian government makes payments in terms of petrodollars to these countries. With the increase in the price of oil at nearly $90  a barrel, there is a huge outflow of dollars from the forex reserve of India. As a result of which the fiscal deficit as well as the current account deficit is increasing at an alarming rate.
v  One of the reasons which can be attributed to such downfall of the rupees is the declaration of the trade war  by the US on China and Turkey. The Trump administration has imposed $250 Billion dollars  tariff on the Chinese goods  exports to the United Sates. The Trump adminstration has also imposed heavy duties on the aluminium and steel imports from Turkey prompting the lira to fall at a record low price against the dollars. This has also contributed in dragging down the value of  the developing countries’ currency like the Indian rupees.
v  Though the Indian export sector’s earning has increased due to such depreciation, an opposite picture is seen in case of the import sectors. The import’s bill has gone up. This has led to the  widening of the trade and the fiscal deficit of the economy.  It will put inflationary pressure on the government , as result of which we can expect a hike in the interest rate by the RBI.
v  There is also speculation that China is going to devalue its Yuan further inorder to gain more access to dollars and thereby help in increasing its inflow of dollars in their economy. This is going to have ripple effect on other countries currencies including the rupees.
v  The higher import bill has also widened India’s current account deficit, with the value of imports now being higher than that of the exports. The current account deficit is expected to widen to 2.8% of the GDP in the financial year 2018, up from 1.9 % last year. This, in turn doesnot augur well for the rupee.

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