Rupee struggles against US dollar, know how public will be impacted by depreciation of currency
The depreciation of the Indian rupee and other currencies is mainly due to the Russia-Ukraine war, which has led to a steep hike in the price of commodities
Over the past few days, the markets have seen most currencies, including the Indian rupee, depreciate against the US dollar. The rupee breached the Rs 81.50 mark against the dollar on Monday, hitting another all-time low at 81.67, according to PTI. While the currency rose in early trade on Tuesday, it still remains above the 81-mark. The rupee has declined significantly in the past few months, especially after the start of the Russia-Ukraine war and the aggressive rate hike by the US Federal Reserve as well as other central banks. The weakening of the currency will have a domino effect on India’s fiscal policy. As the rupee struggles against the dollar, here is all you need to know about currency deprecation:
What does currency depreciation mean?
It means that the value of the currency has fallen relative to other currencies. The term denotes a decline in a currency’s exchange rate. The value of a currency is determined by the demand for it. Depreciation means that the value of the currency has declined in comparison to others, like the US dollar. So for example, if the demand for dollars is rising, leading to an increase in its value, the demand for the rupee will go down.
What could be the possible effects?
The depreciation of the Indian rupee and other currencies is mainly due to the Russia-Ukraine war, which has led to a steep hike in the price of commodities. To control the spiraling effect of inflation, the US Federal Reserve and other central banks have repeatedly hiked interest rates in the last few months. This has led to worries among investors that the banks are not completely successful in their fight against inflation.
The fall in the value of the rupee will make it costlier to import commodities like fuel. This in turn will drive up inflation and can lead to more rate hikes by the Reserve Bank of India to curb the same.
Furthermore, a fall in the value of the rupee can also impact India’s forex reserves. According to data from the RBI, the forex reserves fell $5.22 billion to $545.65 billon, during the week ending 16 September.
This in turn will make the country more vulnerable to financial shocks. It can also drive away foreign investors.
The value of the rupee will now depend on what policies the RBI enacts to curb inflation. Whether it follows the lead of the Federal Reserve to announce a rate hike will influence both the markets and the value of the rupee.
The dollar index, which gauges the greenback's strength against a basket of six currencies, slipped 0.33 per cent to 106.33
Forex traders said positive domestic equities and foreign fund inflows supported the rupee