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What Is A Falling Rupee And How It Affects The People


Posted Date: 27-May-2012  Last Updated:   Category: General    
Author: Member Level: Diamond    Points: 60


Indian rupee is falling and the dollar-rupee rates recently reached above Rs 56 a dollar. It is a widely discussed topic, among public and in parliament.. The opposition parties blamed the current government for this. This shows falling rupee is a major issue affecting all, and is imperative that all should know about it. This article gives fair idea in very simple way about what is meant by a falling rupee, what are the reasons for the rupee to fall, how the falling rupee affects the general people



What is meant by falling rupee


When we say something falls down in the market, we mean its value in the market is falling. That is a person who buys the commodity pays less price for it. As residents of India we do not buy Rupee in the market. We get our Rupee by our wages, salary, payment of our services, etc. But think of a foreign tourist coming to India or our relative from abroad sending money to India. These people have to 'buy" or exchange their own foreign currency for Indian currency. If they have to give only lesser foreign currency to buy the same amount of Indian currency in comparison to earlier occasion, then it means that ''Rupee has fallen".

Where and what for Rupee is sold or bought


A particular currency is valid for transactions in only its own geographical territory. Outside its territory, any transaction involving money is to be done in the currency of the other country or a currency mutually acceptable. Generally for international transactions, the US Dollar is most mutually acceptable currency medium of exchange. So usually the value of a country's currency is related to US Dollar in quoting a price.

What is Rupee vs Dollar relation and what is exchange rate


As seen in the earlier section, US Dollar is the prevalently acceptable currency medium of exchange in international trades. In the case of our country also it is same. So those who deal in international trade, foreign tourists, Indian tourists going abroad, Non-resident Indians abroad, all will be interested to know the Dollar-Indian Rupee – shortly referred as USD –INR exchange rate on a daily basis. This is called the forex quote or foreign exchange rate. Foreign exchange rates are available for most important currencies. The rate fluctuate and there may be ups and downs. IN general forex parlance it is denoted as gain or fall of rupee

USD-Rupee rate means the amount of INR equivalent to one USD. When we say generally Rupee has lost 25 paisa and closed at 56.25 means that for one dollar the closing price for that day is Rs 56.25 wherein it was Rs 56 at start of the day.

What is the meaning of a weak rupee


The falling rupee is weak rupee because it cannot fetch more foreign currency. In the opposite, if the same rupee can fetch more foreign exchange, then it is a gaining currency and if stays so it is called strong.

What are the reasons for falling rupee


Apart from the normal demand –supply factors, in foreign exchange valuation, the economical, and political policy factors of the country are also factors. In the case of rupee also all these factors are responsible for falling or gaining rupee.

Economical factors causing rupee to fall



1.Balance of payments or trade deficit


Every country has its exports or selling goods and service too other countries and import trade or purchases of goods and services from other countries.. For exports we get foreign currency and for imports we pay foreign currency. The net position of this is the balance of payment. India has a deficit balance of payment because our import payments are more than export receipts. This deficit is compensated by receipts from money sent by NRIs and borrowings.. Hence India has to buy dollars to pay its deficit. Naturally when we demand something, the price goes up. So the rupee fetches lesser dollar rupee and starts falling.

2. Inflation and fiscal deficit in the country


Our country is facing inflationary problems for last many months. Though the government and Reserve Bank have various steps, the inflation is not remedied. Due to the deficit, and the inflation the foreign investors are not interested to invest their money and hence the needed continuity in inflow of dollar becomes less and the rupee falls against dollar.

3. Falling forex reserves


When a country has huge forex reserves, it can pay for its imports from its reserves. But when the forex reserves are poor the country has to buy its forex at a high price. Forex reserves of our country had a drastic fall and we have to buy our dollar requirements. This causes rupee to fall

4. Short term borrowings repayment


The foreign exchange markets evaluate the debt repayments of a country in the immediate short term. India has amounts of repayment shortly due,.The country has poured out its dollar reserves in the recent months to intervene against falling rupee. Hence market has sensed the demand for dollar against rupee.

Political and policy factors behind falling Rupee


Though the India is politically stable, there are many indirect signals giving hint that the political government is not strong enough. The weak show of Congress, the main ruling party at centre, in most of the elections and by-elections give a suspicion that it may not come back in the next elections. The buckling of the central government under pressure from its minor coalition parties and withdrawing from many policy decisions make the foreign investors suspicious. This sentiment works against the country, and foreign investors are discouraged from investing till a stronger and clearer picture emerges. This affects the strength of rupee and leads to its fall.

How a falling rupee affects different sections of the people



Who are the gainers when rupee falls


Exporters:
Exporters get their payment in dollar (or other forex currencies) and convert into Indian Rupees, In the situation of falling rupee they get more Indian rupees . Thus a falling rupee is good for the exporters.
Non-resident Indians :
NRIs send money to their family regularly. In a falling rupee market, they can send more Indian rupees to their relatives. Hence in a situation of rupee becoming weak, NRIs and their relatives stand to gain.
Receivers of fees and remuneration in foreign exchange:
People doing online jobs for foreign companies from here and receive payment for that ( example Ad sense revenue) can get more Indian rupee equivalent and they gain when rupee is weak against dollar..

Who are the losers when rupee is falling


Importers:
Importers face the opposite of exporters. In a falling rupee market, they have to pay more Indian Rupee to pay their imports in dollars. So they stand to lose .
Indian tourists, students, Haj pilgrims going abroad:
These category of people have to pay more Indian Rupees to fetch dollars to take care of their travel and needs abroad. So they are badly affected in a falling rupee market, which can unsettle their plans..

How other general people are affected due to falling rupee


Apart from the above categories of people who are directly affected, the general public is affected by the ill effects of a falling rupee. It is for oil import our country spend s most of its forex. When the international price of oil increases regularly, a falling rupee adds to the burden of oil import and causes heavy price rise the petrol, diesel, LPG and other related items. This is what exactly happened recently. This makes the life of general public difficult as this again causes a chain pf general price rise. Other imported good also become very costly. Import firms may face huge loss and face closure and make job loss to many.

Conclusion


Except for exporters and NRIs , all other section of people are affected by a falling rupee. Hence the government has to take remedial steps by boosting imports by encouraging the exporters with various schemes. Govt should take strong steps to stem inflation. RBI should directly sell dollar to importers protecting them from market fluctuations. NRIs should be encourage to remit more Forex by giving them preferential rates of interest for deposit in India as was given earlier. Though falling rupee can be gain to some sections, it is not good for the image of a country. Hence the govt and RBI should take effective visionary steps to arrest fall of rupee
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Responses to "What Is A Falling Rupee And How It Affects The People"
Author: Paresh Gujarati    06 Jun 2012Member Level: Gold   Points : 1
Hello sir, Very nice and lucid language used in the article to make people understand the value and meaning of Rupees getting weak day by day. Thank for make this clear to everyone who does not know the exact meaning of the falling rupees compared to US Dollar. This will I think clear all doubts regarding the title of the post.


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