Impact of Rupee Depreciation on Economy

Last Updated14/03/2022

The rupee is under pressure as it has fallen 3.5% against the dollar in 2022 and touched record lows.
The reason behind it is two-fold: Russia-Ukraine war and expected hike in US interest rates.

Weakening of a currency’s value against other currencies through market forces, that is, demand for and supply of foreign currency is called depreciation.
On the other hand, if it is weakened through administrative action, it is devaluation.
While the process is different for depreciation and devaluation, there is no difference in terms of impact.
India used to follow the administered or fixed rate of exchange until 1993, when it moved to a market-determined process or floating exchange rate.
China still adheres to the former.

Net inflow and outflow of foreign currencies because of external trade, foreign investments, two-way travel, two-way remittances by expatriates, and receiving and providing foreign loans and aid.
Actions of foreign institutional investors (FIIs) also a major cause of the rupee’s fluctuations since mid-1996, when India opened up its capital markets.
Expected rise in the US federal reserves rates which will lead to withdrawal of FIIs from Indian markets
Russia-Ukraine war
High oil and commodities prices

The rupee, which opened at a record low of ₹76.984 was steadied by the central bank’s timely $5 billion swap auction
In 2022, it depreciated by 3.5% against the dollar.

Depreciation of domestic currency helps boost exports of the country
Market interventions are also avoided by the Reserve Bank of India to aid exports.
But imports get adversely hit because of depreciation like crude oil or other crucial items.

Widening of current account deficit
Depletion of foreign exchange reserves
Cost-push inflation with higher landed prices of crude oil and other crucial imports
Increase in fiscal deficit