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Why Indian rupee is deprecating, measures to control it

Introduction: Depreciation in rupee has become a big worry for the Indian Government and breaking news for the news channels these days. Rupee has declined to its peak level in the month of July, 2013 and is expected to continue in coming days.

What is exchange rate or conversion rate: Each country has its own currency and when we convert currency of one country with that of another country, it is called conversion rate or exchange rate between the two countries. For example- 1USD= INR60 which means if we convert 1 USD in INR we will get Rs.60. The conversion rate fluctuates on timely basis based on various factors such as demand and supply of each currency, inflation rate in country, interest rate prevailing in the country etc.

What is currency Appreciation and Depreciation?: Appreciation in any currency means when we exchange that currency with another currency, we will get more foreign currency or we need to pay less home country currency. On the other hand depreciation in a currency means when we exchange that currency with another currency, we will get less foreign currency or we need to pay more home country currency. For example: Few months back, 1 USD= INR 45 which means for each 1$, we need to pay INR 45.While in current situation, 1USD= INR 60 which means for each 1$, we need to shell out INR 60. Thus we need to pay more INR compared to previous situation. Thus in this case, rupee has depreciated and USD has appreciated.

Reasons for Depreciation in rupee:

1. Current Account Deficit: This situation arises when a country's' imports are more than its exports. Due to which it needs to buy more foreign currency to pay off the debts. Increase in the demand of foreign currency will ultimately reduce the value of that country's currency. India is facing a high current account deficit these days which led to fall in rupee value.

2. Inflation: It is one of most crucial factors in determining the currency exchange rate. We are experiencing very high inflation rate in India now. This will decrease the purchasing power against other currencies and will lead to depreciation of the Indian currency.

3. Political Paralysis: In last few months, we have seen various corruption issues. The parliament is not functioning properly due to which several important Bills are pending. The Government is not able to make any firm decisions relating to investment and finance to attract investors. Due to political paralysis in country, the investors have taken a back seat which affected the inflow of funds and thereby led to depreciation in rupee.

4. Recession in Euro Zone: The effect of recession in Euro Zone has been seen in Indian market also. The investors are selling Euros and buying Dollars which resulted in high demand for dollars and thereby increase in value of dollar.

5. Negative remarks of credit agencies: The major credit rating agencies such as Finch, S&P etc. have given negative remarks for India which made many foreign investors to stay away from investing in India for time being which resulted in reduction in inflow of foreign currency and thus depreciation in the value of rupee.

Effects of depreciation in rupee in India:
1. Value of imported items such as laptops, mobile phones crude oil, motor cars etc. will increase as imports become dearer.
2. The current account deficit will increase due to the reduction in exports and an increase in imports.
3. Depletion in forex reserves.
4. The borrowing cost for the companies will increase.
5. Studying and travel abroad will cost more.
6. Deprecation in rupee is good for companies which are billing to its customers in dollars.
7. It is good for employees who are abroad and getting salary in dollars.

Measures to control fall in rupee:
1. Allowing sovereign wealth funds, endowment funds and foreign central banks to invest in government bonds.
2. Raising the foreign investment cap.
3. Boost the slowing industrial growth.
4. More exports incentives and reduce imports.
5. Limit the foreign currency expenditure.
6. The RBI could persuade banks and financial institutions to raise funds in dollars abroad and lend them locally.
7. The government could review sectors such as defense, or revive pension and insurance reforms.

Conclusion: Depreciation in rupee is not a permanent phenomenon but it is due to various reasons, some of which are stated above. Since there are various internal as well as external reasons behind this situation, it is not always easy to make situation better in a blink of eye. It takes time to bring back the situation to the normal state. The RBI and other Government agencies are doing their best to tackle this situation.

By

Azad Singh Bothra