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Rupee Depreciation: Hits all-time low

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Rupee Depreciation: Hits all-time low

Recently, the rupee reached its all-time low and the foreign exchange reserves have come down to below $ 600 billion.

The rupee has again slipped to its all-time low before closing at 76.93 per US dollar. Different factors were responsible for this.

Rupee depreciation is the fall in the value of Indian currency. This decline occurs in terms of its exchange rate relative to other currencies.

India has been following a managed floating rate since 1993. Hence the depreciation or appreciation of Rupee relative to other currencies depends on the following: – Its supply and demand in the foreign exchange market.

Action of the Reserve Bank of India (RBI) to arrest the decline (or rise):

Reducing market volatility and speculation through the buying and selling of other currencies or through capital flow regulations.

Reasons responsible for the recent fall in rupee-

  • The Russo-Ukraine war has led to an increase in the prices of crude oil and other commodities. Central banks have changed their monetary policies to deal with rising inflation. For example, the US Federal Reserve in particular has increased its interest rates by 50 basis points (bps).
  • Foreign investors are moving out of the Indian market to some other safe investment destination.
  • Domestic factors include increase in current account deficit, increase in inflation etc.
  • Effect of depreciation of rupee
  • The RBI’s efforts to contain the fall in the rupee have led to a fall in forex reserves.
  • An increase in the trade deficit will further aggravate the current account deficit and balance of payments crisis.
  • RBI will hike interest rates to deal with rising inflation.

Source – The Hindu

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