Factors why Rupee falling against Dollar

Factors why Rupee falling against Dollar

The first two decades after independence, India had almost a constant peg against the US dollar at Rs.4.75/$, how the value of Indian Rupee drifted down to present level?

In replying to the above question, I would like to add-on how our economy has been time and again battered due to various factors which led to devaluation and depreciation of our national currency.

Economic turmoil in 1966:

In 1966, just after battling 2 major wars (with China and Pakistan) India was tattered by a major drought that deeply shook the whole country. It was a difficult situation for combating trade imbalances of the country. Therefore, on June 4, 1961, then Government of Prime Minister Smt. Indira Gandhi, announced devaluation of the rupee overnight from Rs.4.75/$ to Rs.7.5/$ that attracted the substantial inflow of US $ into India and saved the situation. The intervening period from 1966 to 1980, the value of Rupee remained constant. In the meantime, in 1975 India switched to floating rate of exchange system from the earlier system of fixed rate (pegged rate) of exchange. In a fixed exchange rate system, the monetary authority of a country fixes the value of its currency against a major foreign currency or Gold for trading purposes. Whereas in floating exchange rate system or REER (Real effective exchange rate) system, the rate of the currency is determined by the demand and supply in the currency market for the particular currency.

India is historically major importer of Oil and Gold which is amounting to 53% our total imports. After the energy crisis in 1979 and the steep rise in global gold’s prices in early 1980, Rupee value continuously plummeted. The average value of Rupee under floating exchange rate system depreciated to 8.69/$ in 1981, in 1991 it was at 22.69/$, and in 2001 it further dipped down to Rs.46.66/$. The exchange rate stayed almost constant between 2001 and 2011. In 2012, Rupee value again nosedived to Rs.54/$ due to unabated inflation on account of price rise on essential commodities in the domestic market. In June 2013, United States Federal announced interest rate change to two years high which resulted in the substantial outflow of US Dollars from India and on September4, 2013 Rupee had hit the record low of Rs.68.62/$.The inflation in India reached to 11.24% in November 2013, the highest for years. RBI, the monetary authority of India saved the situation offering fixed deposits to NRIs under FCNR (Foreign Currency Non-Resident) deposit scheme with high guaranteed interest rates. The above action of RBI attracted deposits worth of  US $ 26 Billion into India. In addition to that, the Government of India restricted the Gold import to India that somewhat reduced the trade gap. Pursuant to above actions of policy makers, the Rupee recovered about 10% of its value and stood at around Rs.62/$ in early 2014. The Rupee rate is currently hovering around Rs.65 to 67/$ owing to the continued decline in Indian exports for the past 20 months.

The remittances received during 2013, in the form of FCNR deposits are due for payments in the third quarter of 2016. If the FCNR deposits are not renewed and withdrawn by the NRIs, there is a possibility of massive drainage of US Dollars from India. There is also a danger that continuous downfall in Rupee value, together with high inflation can lose the confidence of foreign investors in the reliability of our currency and they may withdraw their investment from India. In the state of affairs of low exports, the large outflow of remittances and investments may hit massive economic setback to the country. It is, therefore time for the policy makers to find possibilities to reviving and stimulate our economy again.

Click below to know related articles:

(1) Seigniorage: How  the US generates big profit printing Dollar notes?

(2) Devaluation of currency and depreciation of currency, what’s the difference

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