The value of the Indian rupee is continuously falling against the US dollar. The price of the dollar hit the all-time high at Rs.74.33 in October 2018. The alarming fall in the value of Indian rupee is a matter of concern and requires immediate remedial action to control a fall in the value of the domestic currency.
Why is the Indian rupee depreciating?
The value of Indian rupee against US dollar is determined by the market forces of demand and supply for both the currencies. Ahem? Tricky to understand? wait.
India imports crude oil and the prices of which is increasing. How do we pay for this crude oil? In dollars. Therefore this means, we need additional Dollars to pay for our oil imports.
Today’s economic system is an integrated economic system wherein no country can survive in isolation. In September 2018, the central bank of the United States increased the fed rate (the rate at which banks lend reserves to other banks on an overnight basis) by 25 bases points. This had a major effect on the Indian economy as the foreign investors started to pull out their investments from India to get higher returns in the US. This lead to a huge outflow of money from the country.
The United States has initiated a trade war. They are imposing trade restrictions on other countries in the form of tariffs. This has affected exports from India, thus affecting the Indian rupee.
Not just Indian Rupee
It is not just the Indian rupee but other currencies like Sri Lankan rupee, Indonesian Rupiah, Argentina peso have also weakened against the dollar. Out of all the Asian countries India has been one of the weakest performers with a 12 percent fall in the value in the year 2018. The reason is India imports 80 percent of its crude oil consumption.
Role of Reserve Bank of India
The RBI looks after the foreign exchange operations in the country. India follows a managed floating exchange rate system wherein the market forces of demand and supply determine the exchange price but the central bank intervenes in the operations to keep the value within the target range. The RBI does it through its forex reserves. India has forex reserve of$ 400 billion. When the price of the dollar is increasing the RBI sells dollars from its reserves and controls the price. Of late the RBI is following a “hands-off” approach is moderately selling reserves to control the rising price of the dollar.