By the past 7 months, India experienced an all-time low of 3% in its value. Presently the value of Indian rupee against 1 US Dollar is 68.60. This fall in the value of Rupee accounts for many factors like trade deficit, higher crude oil prices, lack of FDI, and higher capital outflows. The Financial Ministry of India along with the RBI is closely monitoring the cash movements and trying to resolve this issue.
US Dollar is considered as one of the most popular global currencies for trade and international transactions throughout the world since 1944.US Dollar is followed by Euro and Yen. It makes up to 64% of all known Central Bank Foreign Exchange Reserves. So, most of the countries use US Dollar as the standard currency for transactions outside their country. India is one such country. The Indian rupee recorded an all-time low of 7.19 in March 1973 and all-time high in 68.909 in February of 2016 against 1 US Dollar.
CURRENT SCENARIO AND REASONS FOR FALLING VALUE OF INDIAN RUPEE:
- Trade deficit:
This is considered as one of the most important reasons for the falling value of the Indian Rupee. A trade deficit happens when a country imports more than it exports. As per the latest reports, India’s trade deficit has hit $14.88 Billion since November 2014. The major imports include gold, crude oil etc. The introduction of GST and demonetization also accounts for the depreciation of Indian rupee by disrupting the domestic supply chains which is derived from the increasing domestic demands. The US has the widest trade deficit of $7 Trillion than any other country. But they are exporting as much as they import. But being a country which imports more than it exports, India loses the value of its currency (Rupee) as it uses a foreign currency for trade.
- Increase in crude oil prices:
Crude oil per barrel is $66.80 presently. India is one among the largest importers of crude oil. It accounts up to 80% of the total oil needs in the country. Ways by which crude oil price affect Indian economy are:
- Oil subsidiary and fiscal deficit
- Rupee exchange rate
- Petroleum producers
Reducing crude oil prices reduces inflation in the country. But, it is to be noted that India is the sixth largest exporter of petroleum products. Fall in crude oil prices also affects the exporting from India. It is a balanced relation.
- Global economic slowdown:
The fall in the value of currency affects the trade in a country. It mainly affects the stock market. China faces a major slowdown in the trade and weak commodity prices. International Monetary Fund forecasts that the global growth slashes to one-third by January 2019. Other emerging markets like India, Brazil etc. are affected by this.
- Lack of participation of FII:
By the starting of this year itself from January 1 to January 20, Foreign Institutional Investment (FII) sold their shares in the domestic market worth 7,146 crores in rupees whereas the Domestic Institutional Investment (DII) stood at a total buying worth 9,129 crores in rupees during the same period.
EFFECTS ON ECONOMY:
- Foreign imports will increase
- Lack of investment
- Increased interest rates in banks
- Decrease in number of consumers for a product
- Fall in growth of economy
MITIGATIONS TO ENHANCE VALUE OF RUPEES IN GLOBAL MARKET:
- Handling trade deficit properly:
As mentioned above, US has the widest trade deficit. But they export products as much as they import. In a way, trade deficit is a good way for exporting products from a country. India has projected a good rise in its exports since 2017 where manufacturing industries is the pacesetter. Defence sector is the least productive as they import 70% of their equipment from foreign countries.
- Competitive financial sector:
A strong currency attracts a large number of investment inflows. Present Indian laws are unfavourable for the foreign investors. A Country like US has strong financial regulations which allow investors to invest very easily. In India, 49% of investment is done through automatic path and above 49% is through government path. Favourable laws attract foreign investors and help to build a competitive financial sector.
- Low budget deficit:
India should implement a long-term vision for keeping deficit under control for a longer term irrespective of political changes. India can then attract foreign investors, extend the period of bonds and also can reduce market risk.
- Better education system:
The education system is also an indirect reason for the fall of the value of Indian rupee. India still follows the conventional methods in education which is not the latest technology oriented. Indian educational system is not being updated with latest technologies. The future of global trade and services lies on innovation and software. India should approach a bottom-up integrated education system which keeps on updating with latest technologies which end up in the budding of new startups and innovation companies hence attracting foreign investments.
The government of India and RBI is closely monitoring the cash flows in and out of the country. India is also trying to increase exporting high-quality goods that have demand abroad. It also means that using Indian goods instead of imported goods accounts the increase in value of Indian rupee. A country’s weak currency constitutes its economic conditions. As a result of free market trading conditions, government usually normalize the supply and demand. According to PM Narendra Modi, “The rupee reflects the strength of the Indian economy and a declining rupee only showcases the fact that we as a nation are living beyond our means.”India is looking forward to increase its exports and cut short its imports thus expecting to increase the value of Indian rupee in context of US Dollar in the near future.