From buying gold for your home, adding petrol and diesel to your car, increasing the price of vegetables… this currency depreciation has many invisible effects on the day-to-day economic activities.
Indian rupee value is a simple explanation
Currency depreciation is the depreciation of the Indian rupee against the US dollar.
From $1 = 50 rupees to $1 = 45 rupees, it means that the value of the Indian rupee has strengthened / increased.
$1 = 60 Rupees means Indian Rupee has weakened / depreciated.
If there is demand for a country’s currency, its value will increase. If there is no demand or nobody refuses to buy the country’s currency, it will depreciate the value of the country’s currency.
Many countries of the world keep currencies like US Dollar, European Union’s Euro, Japan’s Yen… in their reserve currencies.
According to data from the International Monetary Fund, 58.88 percent of the world’s reserve currency was the US dollar and 20.06 percent of the currency was the Euro currency of the European Union during the period January-March 2022 (first quarter).
Due to the fact that the US dollar is used in most countries of the world, its value remains stable compared to other currencies. Indian Rupee is not used by many countries except India, so its value is not very strong.
What are the pros and cons of depreciating the Indian rupee against the dollar?
Benefits:
1. Exports can increase: Suppose a garment company in Tirupur sells a shirt at Rs.75.
During January 2022 $1 = 75 rupees. If a foreign company comes to buy shirts in Tirupur, they will buy one shirt for one dollar at $1 = 75.
Now $1 = 80 rupees. If the foreign company comes to buy the shirt in July 2022, it will buy a shirt for $0.9375. There is no loss to the Tirupur company. As the currency is weak, the foreign company will buy from the Tirupur company.
2. Foreign Exchange: If our brothers and sisters, parents are working in USA, their salary money will mostly come in USD. When they send USD to India, we get more money here. $1000 = 75,000 improves to the same $1000 = 80,000 rupees. The same benefit is available to those who invest in US Dollars from India.
What are the difficulties?
1. Rising Import Costs & Inflationary Imports: Even now India imports most of its crude oil and many raw materials used to manufacture medicines. Many merchants around the world require payment in US dollars. Now for every dollar you buy, you will have to pay a few rupees more. This extra cost is passed on by the companies to the customers who buy the product.
Take the Apple iPhone 13 for example. Let’s assume it costs roughly $800. 60,000 in January 2022, now you will have to pay 64,000 rupees. This cannot be reduced even if the shopkeepers themselves think so. This is called Imported Inflation in English.
Inflation: If the price of essential commodities like crude oil increases, it will gradually increase the prices of other commodities as well. For example, to import crude oil, you have to pay more rupees and buy dollars to import. As a result, petrol and diesel prices will increase, vegetable prices will increase and auto and taxi fares will increase. Bus fares, milk prices etc may also go up due to this.
Interest rate hike: India’s central bank, the Reserve Bank, will hike interest rates to curb inflation. It will increase the interest rate on the loans we are going to buy. It increases our EMI amount or loan repayment period. In short we have to pay the excess money back to the lending bank or financial institution.
Foreign Education, Medical Expenses Increase: Students studying abroad from India and those traveling abroad for medical treatment will have to pay extra and get US dollars.
– gowtham