Rupee Depreciation in 2021

 

Rupee Depreciation in 2021: Relevance

• GS 3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

 

Rupee Depreciation in 2021: Context

• Indian rupee is expected to end 2021 as Asia’s worst-performing currency due to outflow of foreign currency from the Indian market.
• Among the most regional markets, global funds pulled $4 billion of capital out of the India’s stock market, thus leading to the decline of 2.2% in the Indian rupee in this quarter.

 

Reasons of outflow of foreign currency

• Lowering of outlook: Goldman Sachs Group Inc. and Nomura Holdings Inc. have recently lowered their outlook for equities due to lofty valuations.
• Trade deficit: India is experiencing high current account deficit thus leading to record-high trade deficit.
• Policy divergence: RBI’s policy divergence with the Federal Reserve have also led to outflow of foreign reserve from India.

 

 

What is depreciation of rupee?

• Currency depreciation, in our case rupee, means that the domestic currency is losing its value against foreign currencies.
• Just like a commodity, a currency is subject to demand and supply fluctuations (in a floating exchange rate system).
• As US Dollar (USD) is the most traded currency in the world, most currencies are benchmarked against USD, including Indian rupee.
• For example, if rupee has depreciated from 70 to 75, it means that earlier when we paid Rs. 70 to buy a product of worth 1 USD, now we are paying Rs. 75 to buy the same product. However, in case of exports, it means we will get Rs. 75 in case of Rs. 70 for selling a product of worth 1 USD.

 

Is depreciation of rupee bad?

• Depreciation in rupee is a double-edged sword.
• A weaker currency, under normal circumstances, is expected to boost exports, thus leading to increase in foreign currency in the country.
• However, it also poses risk of inflation (due to higher imports), and may make it difficult for the central bank to maintain low interest rates for longer period.
• So, for an export driven country like China, depreciation of rupee is a good thing. For India, however, depreciation is not good as we are an import-dependent country, and in such cases, depreciation leads to outflow of foreign currency from India.

 

 

Rupee Depreciation in 2021: Way forward

• A likely reversal in foreign inflows can be seen in the coming quarter on account of share sales in companies including Life Insurance Corp. of India – India’s biggest initial public offer.

 

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