Winning Bizness Desk
Mumbai. The Indian currency, Rupee, has once again hit its all-time low against the US Dollar. On Wednesday (February 5), the rupee fell by 25 paise to reach 87.37 per dollar during trading. This marks its weakest level ever. Earlier on Monday, the rupee had dropped by 67 paise to 87.29 per dollar. Notably, The rupee's depreciation is driven by factors such as the trade deficit, current account deficit, fluctuating forex reserves, inflation, and potential RBI rate cuts. The immediate impact will be seen in rising import costs and increased expenses for foreign travel and education. The future of the rupee will depend on RBI’s monetary policy decisions and global economic developments.
Top 5 Reasons Behind Rupee’s Decline
1. Trade Deficit: When a country’s imports exceed its exports, it leads to a trade deficit. In November, India’s trade deficit stood at $37.8 billion (approximately ₹3.31 lakh crore), and in December, it was $21.94 billion (around ₹1.92 lakh crore). A high trade deficit reduces the demand for the rupee, leading to depreciation.
2. Current Account Deficit (CAD): CAD is the difference between a country's trade deficit and net earnings from services and foreign investments. An increasing CAD reduces the demand for the rupee. In the last financial year, India's CAD was 0.7% of GDP, and it is projected to reach 1% in FY 2025.
3. Foreign Exchange Reserves: A decline in forex reserves can reduce the rupee’s value. As of January 24, India’s forex reserves stood at $629.55 billion (around ₹55.02 lakh crore), an increase of $1.8 billion compared to the previous week.
4. Inflation: High inflation reduces the purchasing power of the rupee. In December, India’s inflation rate stood at 5.22%, slightly lower than November’s 5.38%. However, it remains above the RBI’s target range of 2-6%.
5. Interest Rates: The Reserve Bank of India (RBI) plays a key role in determining the rupee’s value through interest rate policies. Higher interest rates can increase the demand for the rupee, strengthening its value. Conversely, lower interest rates can weaken the rupee. The upcoming RBI policy meeting may announce rate cuts, which could further impact the currency’s value.
Impact of Rupee Depreciation
A weaker rupee makes imports costlier for India, affecting essential commodities such as fuel, electronics, and medicines. Additionally, foreign travel and education expenses will rise. For instance, when the exchange rate was 50 rupees per dollar, Indian students studying abroad needed ₹50 to get $1. Now, with the rupee at 87.37 per dollar, they will have to spend more for tuition, accommodation, and daily expenses.
How Is Currency Value Determined?
When a currency loses value against the dollar, it is termed **currency depreciation**. Each country maintains foreign exchange reserves to facilitate international transactions. The rupee’s value is determined by supply and demand dynamics in the forex market. If India’s forex reserves decrease, the rupee weakens; if they increase, the rupee strengthens. This is known as a **floating exchange rate system**.
Impact of US Trade Policies
On February 1, former US President Donald Trump announced a 25% tariff on Canada and Mexico and an additional 10% tariff on China, though he later withdrew the decision. This had temporarily stabilized the rupee.
Trump has repeatedly threatened to impose a 100% tariff on BRICS nations, including India, Brazil, and China. He has also criticized India for imposing high tariffs on American products, keeping India at risk of potential trade restrictions.
