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Friday, December 7, 2012

Depreciation of Indian Rupee

Points to be known :-
  • Depreciation of Currency means decrease in the value of currency compared to the Dollar.
  • In 1947, 1 Indian Rupee = 1 US Dollar. Present value (on 07-12-2012) is 1 US Dollar = 54.47 Indian Rupees.
Causes :-
  • High interest rates :- High interest rates may attract foreign investors, but practically high interest rates leads to increase in the government debt, thereby GDP growth comes down. Then foreign investors are unsure of their returns, thereby they may take their investments back. It leads to Rupee depreciation.
  • Demand for Dollar :- When the demand increases the value increases. So, if the demand for dollar increases, it's value increases. And purchasing power parity reduces. Thereby Rupee values decreases.
  • Inflation :- Inflation means increase in prices of commodities. If the inflation increases, purchasing power parity of consumers decreases. Thereby they buy less. It leads to economic recession. Thereby rupee value decreases.
  • Unemployment :- Higher unemployment leads to decline in GDP growth. Hence Rupee values decreases.
  • Changes in International trade :- With the increase in rates of the products which we import, we have to pay more dollars. Then, demand of dollar increases leads to decline in the value of Rupee.
  • Trade deficit :- If a nation's imports are more than exports, it's called trade deficit or trade gap. If exports are less, demand for rupee decreases. It leads to rupee depreciation.
  • Budget deficit :- If the expenditure is more than the income, it is called Budget deficit. When budget deficit occurs, the country may not be attracted by foreign investors and hence the currency value decreases.
 Effects of Rupee depreciation :-
  • Because of the Rupee depreciation, Exporters are at benefit as they will get more rupees for same amount of dollars. 
  • Importers are at loss as they have to pay more Rupees for the same amount of dollars.
  • Foreign investors will lost confidence in the country's economy and they will take back their investments leading to further depreciation of rupee.
  • The price of the goods which have to be imported increases.
  • Tourism and studies in foreign will become expensive.
  • NRIs are at benefit as they will get more rupees for the same amount of dollars.
Conclusion :-
                    
                Even though some temporary benefits are there by currency depreciation, it's not good for the country's economy. Our Government must take necessary steps to appreciate the value of Rupee. Again the value of Indian Rupee should become equal to the value of US Dollar.

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