Why the Rupee is falling: Will it fall further against the Dollar?

Did you know which currency in the world is the most dominant? No? Don’t worry. That is why we are here. The most dominant currency in the world is the US Dollar. Also, the US Dollar is one of the most popular currencies for trading in foreign exchange markets, including the Euro, Japanese Yen, the Australian Dollar, the Great British Pound etc. 

India has been a major importer of crude oil which is used in the making of FMCG products & Iraq, Saudi Arabia & UAE are the leading sources of Crude Oil imports for India. According to PPAC, India's oil import dependence was 85% in 2019-20, which declined marginally to 84.4 per cent in the following year before climbing to 85.5% in 2021-22. The Indian currency's value is highly dependent on demand & supply. So increase in the prices of crude oil & imports is leading to the depreciation of the value of the Indian currency. 

In this article, we will be discussing the fortune of the Indian rupee against the US Dollar.

What has been the value of Dollars to Rupees to date?

What are the reasons for the fall of the Indian Rupee?

The value of the Indian rupee to the US Dollar depends on the demand and supply. In simple words, if there is a higher demand for the US Dollar, the value of the Indian rupee depreciates and vice-versa. 

• If a country imports more than it exports, then the demand for the dollar will be higher than the supply, and the domestic currency like Indian Rupee will depreciate against the dollar.

• And since India is mostly dependent on imports, especially crude oil, the country makes payments in US dollars, contributing further to the fall of the Indian currency.

• So, from this, you have pretty much figured out that the rupee's fall these days is mainly due to high crude oil prices making a strong dollar overseas and foreign capital outflows. 

• The value of the Rupee has been in constant decline, especially after supply chain disruptions due to the Russia-Ukraine war,  global economic challenges, inflation, high crude oil prices & various other issues.

Thus, the more the money flows out of India, the rupee-dollar exchange rate gets impacted, depreciating the rupee. Such depreciation puts considerable pressure on the already high import prices of crude and raw materials, boosting higher imported inflation (where you are ready to pay more for a commodity) and production costs besides higher retail inflation.

How does a weak rupee impact you and the economy?

As we know, India is mostly dependent on imports, including crude oil, metals, electronics, etc., so it has to pay in US dollars. Now that the rupee is weak, it has to pay more for the same quantity of items. In such cases, the cost of raw materials and products within the country goes up that gets passed on to the consumers.

However, on the other hand, a weakening domestic currency enhances exports as shipments get more competitive and foreign buyers gain more purchasing power. But the exporters are not supporting the fall in the rupee against dollars.

Exchange Rates and Measurements

There are multiple exchange rate measurements that a country may choose to operate. There are spectrums available for measurement divided into two categories.

1. Floating method-

In a floating regime, exchange rates are generally determined by the market forces of supply and demand for foreign exchange. The floating exchange rates have been used by the world's major currencies for many years, such as the US dollar, the euro, the Japanese yen and the UK pound sterling.

The floating rate is generally determined by the open market based on supply and demand. Thus, in simple words, according to this method, if the demand for the currency is high, the value will increase. If demand is low, this will drive that currency price lower. (presently, the demand for US Dollar is high, so its value is also increasing)

2. Pegged method or Fixed method-

A pegged regime (sometimes referred to as a fixed regime) is mostly in the form of a currency target fixed at a rate against the US dollar, the euro or a bunch of currencies. There are 2 ways in which countries maintain a fixed exchange rate. 

• Firstly, the purest form of maintaining it is when a country’s currency is fixed to a set value against a single currency. 

• Alternatively, many countries fix a set value to a bunch of currencies instead of just one. So, to wrap it up, countries usually peg it to either a single currency or to a basket of currencies but then permit it to fluctuate within a range of the pegged currency. 

 Here are examples of each of these sub-types:

1. Currencies fixed at a set value to a single currency: Some of the nations promised to give the same amount in their currency forever for each unit of currency to which it is fixed. 

Ex: Aruba, Bahamas, Bahrain, Bhutan etc.

2. Loosely fixed currencies: These countries fix their currencies to a trading range tied to a single or a basket of currencies.

Ex: China, Singapore, Vietnam

Conclusion

With the rupee dropping to 80 against the dollar on Tuesday, its year-to-date fall has reached about 7 per cent. The sectors that will be impacted the most by such a huge fall will be the IT, Pharma, Garments, Oil & Gas, and Tea sectors, etc. Not to ignore the fact that these sectors will be impacted by such a fall in INR, but this will be beneficial for almost all of them like the IT sector will be a huge gainer as they bill most of their clients in US Dollars and the profits are expected to rise in tea sector etc.