Depreciation of Rupee to an All-Time Low of 70.08 against the US Dollar- Should the common man Worry?

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Indian Rupee today hit an all-time low of 70.08 against the US Dollar. The Rupee had been undergoing rigorous depreciation since Monday, and then the low continued on the following morning, finally breaching the Rs 70 mark for the first time ever in intra-day trading, later on Tuesday.

On Monday, the currency had recorded it’s biggest intra-day fall in 5 years, coming down to 69.93 against the Dollar, primarily as a consequence of the global currency crisis, caused by the Turkish Lira Crisis. On Tuesday, the rupee crossed the psychological 70 mark at around 10:30 a.m. However, trade closed at a relatively better 69.90 as compared to Monday.

CONSEQUENCES:

The recurrent depreciation of the Indian currency in the recent times may have been stirred by a plethora of external factors, but the consequences remain largely constant.

• Imports become expensive as 1 Dollar worth goods now demand a higher payment. On the other hand, exports are expected to rise, owing to the fall of the domestic currency.
This change is likely to affect the current account deficit (the difference between foreign earnings and expenses). Theoretically, the change is expected to be positive, given that imports are discouraged and export revenues are to increase.
However, in reality, we already are in a position of deficit in the Balance of Payments, and expensive imports will only further increase the deficit. This is because items like oil, that constitute a major portion of the imports, are more of necessities rather than luxuries and therefore, imports barely see a fall despite rising prices.

Expensive imports
Depreciation causing Imports getting Expensive: Furthering Deficit

Secondly, investors follow a policy of risk aversion, and pull out of riskier markets. Furthermore, even the developed countries that have innumerable avenues open for imports, do not hesitate before reducing imports from particular markets that are getting expensive. These factors reduce the probability of increased import revenues balancing the deficit.

• There is an inflationary pressure in the economy caused by an increased import expenditure. This pinches the pockets of the consumers as most Fast Moving Consumer Goods (FMCG) become expensive.
• Foreign education and travels in general become more expensive.

EXPERTS REACT:

The expert reactions to today’s fall have suggested the country that this must not be a cause of worry. They attributed the cause of the fall to external factors and reassured that the RBI has a high reserve of forex and can use it when required. The only problem possible will be caused if the people over-react and this over-reaction must therefore be prevented.

Summary
Article Name
Record Depreciation on Rupee against Dollar- Should the Common man Worry?
Description
Rupee depreciated to an all time low of 70.08 against the US Dollar on Tuesday. Causes and consequences.
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BulletinXp

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