Rupee Depriciation
Have you ever had a thought why 1 Rupee is not equal to 1 USD. Actually it was, In 1947 while India achieved independence as it did not have any external debt. But it saw a first major devaluation in the year 1966 due to Indo Pak War in 1962 and the Indo China War in 1965 which led to the government spending a lot on them thus led to financial crises in India. Foreign Aids and IMF Loans came with a condition to devalue from 1 $ = 4.76 Rupee to 7.50 Rupee. Over the period of 25 years it further depreciated to 17.5 Rupees in 1991. In 1991 India faced the Balance of Payment crisis. It’s such a grave situation that our forex reserves fell to less than $1 billion which were barely enough for less than 2 weeks of imports. Then the IMF offered a Bailout loan on the condition of opening up the Indian economy to the outer world which were popularly known as LPG Reforms. At this situation the Rupee fell from 17.5 to 23 Rupees per USD. And later gradually it dropped to 35, then to 42 due to Asian Financial Crises in 1998, then to 50 due to Global Financial Crises in 2008, then to 68 in 2013, then to 76 due to Covid —19 in 2020, Now i.e., in 2025 at 86 due to consistent trade deficit, inflation, global uncertainties.
There are 2 ways in which the currency can drop: 1. Depreciation 2. Devaluation
Depreciation: It is led by market forces and no manual intervention in it in the floating exchange rates system.
Devaluation: It is done by the Central bank in the fixed exchange rate systems. The value of currency is manually decreased.
What are the various reasons for Depreciation and what contributes of them to the current scenario?
- High Import Bills caused by significant import good demand and weak exports are causing Trade Deficit.
- US Monetary Policy is causing a hike in the interest rate of US Bonds there Investors withdrawing from India and Investing in US
- High Inflation in India makes goods costly, so the Investors withdraw Money from India
- Outflow of Foreign Investments from India due to various reasons
- India imports 85% of crude oil which is the highest contributor to Import bill.
- Global Uncertain Situations like Wars and Recent Trump’s Mission of MAGA in causing uncertainty about economic situations in developing countries
- Weak Domestic Growth causes Investors to lose confidence in the country and move out.
Of these Global Uncertainties and High Import Bills are costing this Depreciation. As Quoted by Raghuram Rajan former RBI Governor, “ Fixation always happens with Rupees Dollar Exchange Rate. The dollar has been strengthened against all currencies, the Euro has dropped from 91 to 98 cents. It is the problem of Dollar not rupee due to raise in confidence in US Govt by imposing tariffs which brings their trade deficit down, and is hoped by the investors to be a Safe Heaven, so Investors are buying Dollar assets by withdrawing money from Other Nations”. All other Asian, G10 currencies like South Korean Won dropped by 8.1%, Indonesian Rupiah dropped by 6.4%, Malayasia Ringgit dropped by 5.9%, Japanese Yen dropped by 7%, British Pound dropped by 6.6%, Euro dropped by 5.8% same as India’s Rupees also fell from 83 to 86 i.e a drop of 3.6%. This is part and parcel of Global Economy and there are chances to come back or at least stop dropping further.
