Rupee Depreciation and its impact – UPSC GS3

  • Rupee fell sharply by 105 paise. It is considered as one of the biggest single-session falls in 20 months.
What are the reasons for rupee depreciation?
A combination of factors are responsible for rupee depreciation, such as
  • Concerns over Covid-19 has created uncertainty in the market. This affected the FDI(Foreign Direct Investment) and FII(Foreign Institutional Investment). So the rupee weakens further.
  • RBI’s Government Securities Acquisition Programme (G-SAP) that seeks to buy bonds worth Rs 1 lakh crore might be one of the reasons. It is a quantitative easing policy followed by RBI. The policy supported the government’s increased borrowing Programme through the infusion of liquidity.
  • Strengthening of the dollar against the euro also contributed to rupee depreciation.
  • RBI’s status-quo on policy rates is not helping to increase demand in the local economy. This will further impact the rupee.
  • Value of the rupee will also be impacted by the high bond yields in the US and the inflow of dollars into the US.
What are the impacts of Rupee depreciation?
It has both positive and negative impacts.
Positive Impact:
  • Exporters get more rupee per dollar.
  • Depreciation has a positive impact for an NRI. As they are sending money back home they will get more rupees per dollar.
Negative Impact:
  • Importers have to pay more rupee per dollar.
  • Depreciation will have negative impacts on fuel costs and education cost in abroad. For example,
    • A depreciating rupee increases the cost of crude import. A rise in cost of crude raises fuel prices and inflation. Crude import accounts for almost 20% of India’s imports.
    • Higher education in the US might cost an annual fee of US$ 50,000. A 5% depreciation in the rupee (For example, from 72.5 to 76.125) will raise the cost for one year from Rs 36.26 lakh to Rs 38.06 lakh (Net loss Rs 1.8 lakh)
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