There is no doubt about the fact that the US Dollar is the most powerful currency of the world. The Dollar holds a supreme position over other currency and posses the power to value many currencies. The Dollar has the hegemony over all the currencies. If we look into the stats we will find that, the US dollar along with the Euro and Yen makes up almost 64 per cent of the world trade.
Every eye is on the Dollar and the Indians too are very keen to know the valuation of the domestic currency over the Dollar. But the Indian currency is depleting in front of the US Dollar which is not too good for the Indian economy. At present the value of the Indian Rupee is continuously falling and has declined by 12%.
Going Back in Time
At the time of independence, the value of Rupees as compared to the Dollar was as same as that of Dollar. But, as the years passed, the Indian Rupees has lost its value. Being standing at the same footing, the value of the Dollar has increased drastically. It’s been more than 70 years that the country has got the independence and the citizens are confused about the degrading value of Rupees.
The position of the Indian Rupees describes the economic condition of the country. It shows how powerful we are in terms of economy. India was a newly born country in the year 1947. The country was burdened with many activities, like promoting education, bringing people out of poverty, development of infrastructure and above all being a stable economy.
At the time when the country finally got independence from British rule which lasted for almost 200 years, it matched the US Dollar because of an appreciable balance sheet. But gradually the Indian Rupee started witnessing devaluation. At the time when the India has launched its five year plan, the Indian Rupee stated losing its significance.
At the cold war era, in the year 1971, one US Dollar was equals to 7.5 rupees. The equal value of the Indian Rupee and the US Dollar was because of the fact that at the time of independence, India’s borrowing from the United States of America in its balance sheets were nil and after the introduction of the five year plan for the development of the country began, the Indian Rupee pegged down valuing 4.75 rupees for One US Dollar.
Meaning of Devaluation
Devaluation means a situation when the external value of the domestic currency decreases while the internal value of the currency remains the same. The domestic currency depreciates which means that the value of currency decreases because of the market forces, such as the demand and supply. During independence the system adopted by India was the Par Value System of International Monetary Fund (IMF).
Reason behind depreciation
We have encountered the value of the Indian Rupee depreciating against the Dollar. There are many reasons for this gradual decrease. But the following are primarily the most important reason for this gradual depreciation, they are:
- increase in the price of the Crude oil,
- the trade war between the United States of America and China,
- increase in trade deficit of India,
- out flow of the reserved foreign currency, and
- political disturbances within the country.
Increase in the price of the Crude Oil:
India is not self reliant in producing the Crude oil. India only produces 20 per cent of what the country requires. Rest 80 per cent imported by the country from other countries like Saudi Arabia, Iran, Iraq and other Gulf countries. This is the biggest expense that India is paying in Dollars to other countries.
As per the stats available from energy research and consultancy firm Wood Mackenzie, the daily fuel requirement in the year 2018 has increased double of the previous year’s fuel requirement. In 2017, the daily fuel requirement of India was 93,000 barrels and in 2018 it has increased to 1,90,000 barrels which is more than the double.
Therefore, the import of the Crude oil from other countries adds up to the bills of India. With this increase in the demand the bill of oil import shall also increase. The payment for the import of crude oil will be in Dollars and as the demand of Dollar will increase in the Indian markets, and then the value of Indian Rupee will surely depreciate.
The trade war between The United States of America and China:
As Donald Trump became the 45th President in the year 2017, this republican president started a trade war between China and the European countries. India and these other countries are facing each other in the same way. For this rivalry, the prices of the essential commodities that are imported are going up and will in turn raise the outflow of the Dollar from the boundaries of India.
The exports from India are not at a great rate, but the imports are much more. This results in more out flow of the Dollar as compared to its inflow.
Increase in the Trade Deficit of India:
Trade deficit is the amount by which the cost of a country’s imports exceeds the value of its exports. It is an economic measure of international trade.
Looking into the figures available, the trade deficit in the financial year 2012-13 was the highest, as the country had reported the trade deficit of 190 billion US Dollar. After this period, the highest trade deficit was reported in the year 2017-18 which was 157 billion US Dollar. In the financial year 2016, the trade deficit was around 118 billion US Dollar. Therefore, this date represents that the outflow of the US Dollar was more as compared to the inflow of that currency.
The law of demand provides that there is there is a direct relationship between the demand and the price of the commodity. In the same way, when there is a trade deficit, i.e. the outflow of the currency, the demand of the US Dollar within the boundaries of the country goes up, depreciating the value of the Indian rupee.
Out flow of the reserved foreign currency:
The Indian investors are provided with many opportunities within the boundaries and beyond it. When such investors get a better opportunity in foreign market, they release there invested money by selling the equity shares acquired by it. For this, they demand for Dollar. As the demand increases, the value of Dollar increases with a decrease in the Indian Rupee.
The foreign portfolio investors are pulling out large amount of investment both in the equity share and the debt market.
Political Disturbance within the Country:
In previous years of NDA ruling, the government lost the popularity. A question raised in the minds of people that will the ruling NDA government be able to administer effectively. The foreign investors were also uncertain about the credibility of the country. This air of uncertainty compelled the foreign investors to pull out their invested money for investing them at some secured markets.
Therefore, the fluctuating rates of the Indian Rupee are due to one or the combination of these reasons. The government should check the flaws which exist internally to cope up with this changing trend.
Consequences of Falling Value of Indian Rupees
There are certain implication of the falling Rupee value, they are:
A. On Imports: A fall in the value of Rupee means that the cost of the importing goods will rise. This inverse relation can be understood by the Law of Supply, which provides that as importing of goods increase the rupee value will encounter a fall. The importers will now be helpless to pay more Indian Rupees to buy the same amount of Dollar which they were previous buying at lesser rates.
B. On Exports: The group of people which will enjoy certain benefits from decreasing value of Rupee are the exporters. They will be benefited in the way that they will get more Rupee when they convert their dollar earning to Rupee.
C. On Economy: The economy of the country will be hit badly. As already read, the country is the third largest importer of the crude oil from the Gulf countries for which India has to pay the bills in the US Dollars. The fall in the Indian Rupee will increase the prices, which will impose a pressure on the CAD. This results in a situation of inflation in the country. The RBI may increase the interest rate to check the inflationary pressures. This will also result in the fall of the Foreign Direct Investment.
D. Inflation: with the falling value of money, the imports will be more expensive, which is likely to drive inflation upwards.
E. Oil Price: The depreciating Rupee will increase the bills of importing oil for India. More rupee shall be required to be paid for per barrel of oil, which also has a key role in driving the inflation in upward direction.
F. GDP: the Gross Domestic Product is favourable when the inputs are costlier and this in turn makes the finished product of the output more costly. But, the consequent decrease in demand due to higher prices could nullify this favorable growth.
G. Tourism: tourism will flourish in India as their currency now buys more in India.
The Reserve Bank of India and other economists knows the changing value of the India Rupee and are therefore, working hard to stable the condition of the India Rupee. The Indian currency i.e. the rupee is the economic pride of our country. Such changes trends will defect the economic value of the country as a whole.