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  • Category: Finance and Investments

    What are the reasons for recent devaluation of Rupee against Dollar?

    Concerned about devaluation of Rupee against Dollar? Know the reasons of such devaluation and steps to take to overcome this problem.

    We have seen that recently the Rupee value has fast devalued against the Dollar. Have other currencies in world also suffered in same way with respect to Dollar or only Rupee has been affected so adversely?

    What are the reasons for such devaluation? How does it affect our economy?

    What corrective actions can be taken by the Govt to tackle this problem?
  • Answers

    6 Answers found.
  • Reasons for the devaluation of rupee against Dollar-
    1.) Prices of Crude Oil-
    We all know that when it comes to importing of crude oil, US ranks high on the list. Whenever the price of crude oil decreases, it implies that the United States save enough dollars to purchase it. All these will help to strengthen the dollar and cause falling down of other currencies including rupee at the forex market.
    2.) Slowdown experienced in the world economy-
    Slowdown is one of the important factors that have been impacting the devaluation of currencies. It contributes to falling in the stock market and currencies.

    Only Indian rupee does not suffer from devaluation. Even other currencies used in different nations throughout the world do suffer from this kind of devaluation.

    Effect of devaluation on economy-
    Currencies exchange rate is not a true indicator of how economically strong country is. Though India is witnessing a persistent fall in the value of rupee but when compared its economic position right now is much better than the economic position that it witnessed in the historic year 1947. The real problem is not the devaluation of the rupee against the dollar but the consistent fluctuations that are experienced in the currency world. Every country including India needs its currency's stabilization. It can be any amount per US dollar. Fluctuation displays a high amount of volatility which is definitely not good. Thus, it is not good for the country's economy. If it keeps fluctuating, it will increase the risk of further fall in the value of Indian rupee.

    Corrective actions that Government can take to prevent devaluation of rupee-
    1.) The government should decrease the imports and make efforts to increase exports.
    2.) The government should adopt various ways by which foreign countries can make their investment in India. For this, it is very important to ease up the FDI rules. FDI stands for Foreign Direct Investment.
    3.) There is a need to increase FDI in various sectors such as defense, retail, and telecom.
    4.) It should take a step to decrease the volatility and bring stability in Indian rupee.
    5.) It can increase the duty on import of gold.

  • The rupee is losing its value against the dollar over the last few months. It has lost its value by more than 5% this year. The fall is very significant in the last few weeks. The currency is at its lowest in more than a year. There are some other countries whose currency value is also coming down. Indonesia, Argentina, Mexico and Turkey are to name a few.
    One of the reasons for this is the slower growth in the supply of US money. It will affect the value of other currencies against dollars. The availability of dollars in the global market will reduce.
    We have to pay our currency for the purchase of goods at the value of dollars. So the value of goods in Indian currency will increase. Hence the purchasing power of Indians globally will come down. For exports, they may get a higher price but they may have to pay more for their imports. The people who are investing in the US may become sronger. But in the other markets, there may be a dip.
    Reserve Bank of India has to control the money supply and domestic interest rates by its monetary policy stance. RBI can also try to intervene in the direct forex market.
    Another way is to decrease the imports and becoming self-sufficient, The exports from India to other countries should also be increased.

    always confident

  • It is said that US economy affects the whole of the world. It is true. Recently US has taken certain steps which has helped it to get the focus of big investors to home funds. Even the rate on domestic deposits was pegged up.

    These measures strengthened the dollar and many currencies lost ground against dollar and got devalued.

    There are many other factors also and now the various Govts will take reciprocating actions to get their currencies back to same strength.

    Our country has also to control the import and export accordingly and take fiscal measures which strengthen the Rupee. RBI is already on the track and will soon be issuing new measures to arrest this fall.

    During such times the importers are badly affected and Govt has to promptly reduce the import duties to compensate for Rupee devaluation.

    Thoughts exchanged is knowledge gained.

  • There are a few things which can be best done to curb devaluation of rupees. We may include the following ways to help the the appreciation of rupees.
    1) Keeping in view of large circulation of cars, taxis and other transportations which all consume fuels in massive amount, we can at least adopt a few practical measure such as hiring of taxis on sharing basis, use of friend's car on alternate days or vice - versa so that use of car is drastically reduced.
    2) For a short walking distance, use of bicycle is to be encouraged. This will also reduce pollution.
    3) Decreae of imports is proportional to the saving of fuels and any saving in consumption of Petrol and Diesel would lead to saving.
    4) RBI should take stringent control to tighten money - supply and adjustment of interest rate would be necessary.
    5) There should be a curb of import items which unnessarily fuels the excessive billing such as Austrilian- coke in lieu of our Indeginious coke on the plea of high ash - content in the later case. Of course, experiments are going on to reduce the former pattern.

  • A. Have other currencies in world also suffered in same way with respect to Dollar or only Rupee has been affected so adversely?
    Other currencies in Asia have also been affected as a result of a slowing global economy.

    B. What are the reasons for such devaluation? How does it affect our economy?

    The reasons are a little complex and there is more than what meets the eye. In short, it would be a case of a very strong USD (US dollar) that is making the INR (Indian rupee) look weak. This is supported by the fact that the economic situation within the country is comparatively better than the global economic situation.

    If we see the INR vs the USD, it was Rs 64.29 this day last year, in comparison it is Rs71.87 this year.
    The important reasons are

    1. The growing demand for the USD by the international market and trading countries.

    2. The Chinese yuan was also weaker ( except the last two days) and the US Chinese trade war has made USD stronger and much sought after commodity.

    3. Rasing crude oil prices, the major culprit. Last year September it was 53-54 USD/barrel and this September it is 77-78 USD/barrel. This financial year alone, India is grappling with a RS 53,000 crore fuel subsidy bill.
    Nomura, a global financial services player has stated that for every 10 USD raise in the crude oil/barrel, the impact on the fiscal balance of India is by 0.1% and the current account balance by 0.4% GDP and increases inflation by 0.6-0.7 points.

    4.Due to the adverse impact on the Indian bond prices, the US trade wars, Foreign investors have pulled out Rs 46,000 crores so far this year. This has an negative impact on the strength of INR.

    5.Strong growth of US GDP. In the months of Apr-June, the US GDP has doubled from 2.2% to 4.1% which is another factor the impacts the strength of the USD.

    C. What corrective actions can be taken by the Govt to tackle this problem?

    The positive news is India (along with China, Brazil,Russia) is better placed to handle the growing value of the USD.

    The RBI will have to raise interest rates, attract foreign investments, restrict the net outflow of FDI each quarter etc. At times of crisis, the RBI can sell it's dollar reserve and or borrow from NRIs. The extent to which the RBI acts would be guided by the global cues and the global economy. The weaker rupee helps in exports and to compete with the very cheap Chinese goods. India should focus on keeping the lid on the inflation rate and the domestic economy until this phase passes off.

  • There are three major concepts driving the Exchange rate.
    1. Purchase parity power
    2. Import of goods from foreign country
    3. Economic condition of countries

    1. PPP(Purchase Parity Power)
    Purchase parity power is the factor which are driving exchange rate variance between two currency.
    All product sin India may cost Rs.700/- in 2019
    Same all product in US may cost only 10 USD in 2019.

    The same all products in India may cost Rs.800/- in 2020
    But in US, the same all product cost only 10 USD in 2020.

    In year of 2020, there is an inflation of Rs.100/- in India but in US, no inflation.

    Your inflation should not affect US to import your product at high rate so inflation in local country will be adjusted in exchange rate. The exchange rate is not specific to product. It is based on overall GDP.
    2019 1 USD to 70 INR
    2020 1 USD to 80 INR

    2. Import of more goods from a country

    When you import lots of goods from United State, Demand for the currency increases so you need to pay more amount of INR to get USD paid.
    Based on money demand specific to country, the exchange rate my vary.

    More import of Goods & Service from US may cause devaluation of INR.

    3. Economic Condition
    If Indie encourages the FDI more from US, the Indian market may be affected by business wise. Local business people will be affected. Indian small & mid business people will get affected.
    Profit from Indian business will get transferred to US. That makes US economy good and make more demand on united states business.
    Less GDP:
    Less amount of GDP production may cause economic week & raise a need to import more & raise need to inflation.
    influence in local market:
    Indian products may get affected due to FDI so it may affect for GDP growth. Ratio of GDP will be influenced by foreign investor.
    influence in Government policies:
    Due to more influence of Less GDP, Government policy should be framed to increase GDP growth otherwise economy will get week & currency will get devalued.
    Government reserves & Gold:
    When government maintain proper Forex reserve & Gold, they are not depending on international market to buy currencies otherwise the currency demand will increase.
    Loans from foreign currency:
    When we get more loans from United Sate, the demand for the currency will increase.

    All above cases are happening in India since beginning so the exchange fluctuation is happening.

    Thanks and Regards,

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