UPSC Express

Headline : What does the falling rupee mean for you and economy?

Details :

Context

• Since the beginning of 2018 rupee has fallen by about 6 per cent in value against the US dollar hovering past ₹70 to a dollar.

 

What is meant by Depreciation of Rupee?

• Rupee is said have depreciated if we end up paying ‘more’ rupee to get the same amount of dollars.
• This happens in situations where the demand for US dollar increases in India and as a result we pay ‘more’ rupee to get the same amount of ‘dollars’

 

Reasons behind rupee depreciating

Rising crude prices in global markets:

• As a result of re-imposition of sanctions on Iran by USA, the oil supply has taken a hit increasing the oil prices.
• US oil rose above $70 a barrel for the first time since November 2014.
• Since India imports nearly 80 per cent of its oil, the rupee has depreciated.

Strengthening dollar:

Strengthening of US economy as a result of protectionist measures has pulled back money from emerging markets.

 

Impact of depreciation:

Impact on Trade:

• As a result of paying ‘more’ rupee to same amount of dollars, we end up paying more for our imports- Imports are costlier.
• On the other hand, we end up getting ‘more’ rupee for same amount of dollars when we export something- Exports get cheaper.

Impact on CAD:

• A currency of an economy weakens when it owes more money in foreign exchange than what it earns. This is called the current account deficit.
• As a result of high import bills, we are witnessing high trade deficit and thus high CAD.
• India’s current account deficit rose to 1.9 per cent in the quarter to March 2018. It was 0.6 per cent in the same period last year.

 

Impact on Inflation

• India imports nearly 80 per cent of the crude oil requirements.
• As a result of high import bills on account of crude oil imports, we end up pay more for fuel domestically.
• Paying more for fuel implies high fuel cost, transportation cost etc.
• This drives high inflation throughout the economy.

 

Impact on GDP growth

• There is no correlation between GDP growth and depreciating currency.
• Depreciating rupee affects GDP in two ways:
  • Costlier inputs because of high inflation and the subsequent increase in the prices of finished goods should have a positive impact on GDP.
  • However costlier outputs mean decrease in demand has a negative impact on GDP.

 

Impact on individuals

• Higher prices of goods and services.
• Costlier petrol and other fuel.
• High cost of education, health abroad and outbound tourism.
• Export-oriented industries may also create more jobs.