What does the falling rupee mean for you and economy?

Headline : What does the falling rupee mean for you and economy?

Details :

Context

Since the beginning of 2018 rupee has fallen by about 6 per cent in value against the US dollar hovering past ₹70 to a dollar.

What is meant by Depreciation of Rupee?

Rupee is said have depreciated if we end up paying ‘more’ rupee to get the same amount of dollars.
This happens in situations where the demand for US dollar increases in India and as a result we pay ‘more’ rupee to get the same amount of ‘dollars’

Reasons behind rupee depreciating

Rising crude prices in global markets:

As a result of re-imposition of sanctions on Iran by USA, the oil supply has taken a hit increasing the oil prices.
US oil rose above $70 a barrel for the first time since November 2014.
Since India imports nearly 80 per cent of its oil, the rupee has depreciated.

Strengthening dollar:

Strengthening of US economy as a result of protectionist measures has pulled back money from emerging markets.

Impact of depreciation:

Impact on Trade:

As a result of paying ‘more’ rupee to same amount of dollars, we end up paying more for our imports- Imports are costlier.
On the other hand, we end up getting ‘more’ rupee for same amount of dollars when we export something- Exports get cheaper.

Impact on CAD:

A currency of an economy weakens when it owes more money in foreign exchange than what it earns. This is called the current account deficit.
As a result of high import bills, we are witnessing high trade deficit and thus high CAD.
India’s current account deficit rose to 1.9 per cent in the quarter to March 2018. It was 0.6 per cent in the same period last year.

Impact on Inflation

India imports nearly 80 per cent of the crude oil requirements.
As a result of high import bills on account of crude oil imports, we end up pay more for fuel domestically.
Paying more for fuel implies high fuel cost, transportation cost etc.
This drives high inflation throughout the economy.

Impact on GDP growth

There is no correlation between GDP growth and depreciating currency.
Depreciating rupee affects GDP in two ways:
- Costlier inputs because of high inflation and the subsequent increase in the prices of finished goods should have a positive impact on GDP.
- However costlier outputs mean decrease in demand has a negative impact on GDP.

Impact on individuals

Section : Economics

Upsc Wing