The news that the value of the Indian rupee against the dollar has fallen to an all-time high is often seen. What is Rupee Depreciation? Why does this happen? Details about this can be found in this post.
Forex
Forex stands for Foreign Exchange. This is called foreign exchange in Tamil.
Simply put, Forex is the money held by a country from other countries. Forex in India is foreign currency like dollar in India’s balance for example. Forex reserves act as a safety net for India in case of economic slowdown.
Forex balance can be calculated by 3 different components:
– The first is Foreign Currency Assets (FCA). Foreign currency assets are investments in the securities of a foreign country. India invests two-thirds of its foreign currency assets in US bonds.
– Second gold.
– The third International Monetary Fund is called the International Monetary Fund (IMF).
64 percent of global banks’ forex is dollar-denominated. The Euro is next at 19.9 percent globally. As 85 percent of global trade takes place in dollars, the dollar is vital in international trade. How did the dollar become such a powerful currency globally?
History of the Dollar
During World War II, the United States played a major role in supplying weapons to the Allies. As various countries had their own currencies, they offered gold to the US in exchange for arms. Thus at the end of World War II, the majority of the world’s gold came into the possession of the United States.
It also became impossible for the nations of the world to regain their gold reserves. To find a solution to this problem without affecting any country, 44 countries met and discussed in America in 1944. This conference was called the British Woods Conference. It was at the end of this conference that the World Bank and the International Monetary Fund were formed.
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At this conference, it was decided that trade would no longer be dependent on gold, but on the United States. So it was decided to trade in dollars and the rate of conversion of each country’s currency to dollars was also decided. Similarly, at $35 per ounce, gold was converted into dollars. Thus the US was responsible for keeping the dollar price stable against gold. After this, instead of gold reserves, other countries accumulated US dollars in their reserves. Thus the US dollar was officially crowned as the international currency.
Japan and the European countries worked hard to rebuild their economies after World War II. This resulted in higher demand for US goods and the dollar. In the 1960s, exports from European countries and Japan began to compete with US exports. As the U.S. share of world output fell, so did demand for the dollar. Following this, instead of converting gold into dollars, the countries of the world started converting dollars into gold.
Eventually, the US held more dollars than gold. Following this, in 1971, the then US President Richard Nixon banned foreign countries from converting their dollars into gold. This ban ended the British Woods Conference Resolutions. After this, the US dollar has been the international currency even when there have been economic recessions such as inflation and unemployment in various periods.
This is the history of the dollar. But why is the rupee depreciating now? There are various reasons for this decline. The US Federal Reserve has recently raised interest rates to control inflation in the United States, which has risen to a level that has not been seen in many years. As a result, foreign investments in India are leaving.
Similarly our Reserve Bank also increased the repo interest rate which is the reason for the decline of the Indian rupee. Months of war between Ukraine and Russia have pushed crude oil prices to record highs. Due to the fluctuations in oil prices in the international market, the value of the Indian rupee has fallen. Because India imports 80 percent of its oil needs. As a result, in the context of India’s exports decreasing and imports increasing, the value of the Indian rupee falls due to this shortage. There are many more reasons like this.
What will happen to us if the value of the Indian rupee falls?
Currently, the value of the Indian rupee to one US dollar is around 82 rupees. Thus, we have to pay a higher price to buy a product from abroad. Similarly, when we export to countries including America, we do not get enough price. Therefore, if the Indian Rupee depreciates, our products will become cheaper in the international market. Due to this, the entire economy of the country will be affected.
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