Impact of falling rupee on Indian economy

falling rupee (2)

Theme :-

  • From the past few months, rupee value is continuously depreciating. Several factors such as rising crude oil prices, higher capital flows, strengthening dollar etc. are contributing to the depreciation of rupee. As of July 2018, 1 US Dollar  = 68 Rupees.

What does it mean by ‘falling rupee’?

  • Value of any currency decreases when its demand decreases. And also if the demand for US dollar increases, rupee along with many other currencies weakens against USD.

Impact of falling rupee on Indian economy :-

  • Imports from other countries will become expensive & exporters will get more rupees for the goods they export. With this situation, we expect that imports will decrease and exports will increase which boosts our economy. But in reality, continuous depreciation of rupee is worrying importers, and thereby they are buying more stock in advance to avoid paying higher price in the coming days. This is causing more demand for dollar.
  • Many exporters are postponing exports to get more profit as the value of rupee is continuously falling. This is increasing Trade deficit (Imports – Exports), which inturn increases Current Account Deficit (CAD).
  • Traders will prefer to export goods rather than selling them in domestic markets. This will increase the prices in domestic markets. Along with that as imports are costlier, imported goods will become expensive. As a result of this entire process, inflation occurs. When inflation is too high, sales will be dropped affecting country’s economy.
  • Rise in inflation will reduce savings from people. This will negatively impacts country’s economy because savings and investments are extremely important for economic growth.
  • Repaying foreign debts will become much more expensive. This will increase burden on Indian economy.
  • Falling rupee increases pressure on Foreign exchange reserves.
  • Weak and fluctuating currency will discourage foreign investors from investing in the country. Thereby Foreign Direct Investment (FDI) inflows to India will slow down. Some investors will sell off their holdings in India causing capital outflows. This will further reduce the demand for rupee.
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Conclusion :-

Though we cannot control some factors like increasing crude oil prices, trade wars etc., we can take some steps to strengthen rupee or at least to prevent further fall of the value of our currency. Steps to retain trust of investors, to attract more FDI, to reduce the dependence on imports by encouraging domestic manufacturing industry, investing more on the development of renewable energy resources to reduce crude oil imports will help in strengthening Rupee.

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