{"id":34149,"date":"2024-12-23T18:20:28","date_gmt":"2024-12-23T12:50:28","guid":{"rendered":"https:\/\/www.nextias.com\/ca\/?p=34149"},"modified":"2024-12-23T18:48:43","modified_gmt":"2024-12-23T13:18:43","slug":"the-falling-indian-rupee","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/editorial-analysis\/23-12-2024\/the-falling-indian-rupee","title":{"rendered":"The Falling Indian Rupee"},"content":{"rendered":"\n<p><strong>Syllabus: GS3\/ Economy<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>In Context<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The Indian rupee recently crossed the 85-mark against the US dollar, continuing a long-term <strong>trend of weakening relative to the dollar<\/strong>. A decade ago, this rate was \u20b961, and it was \u20b983 earlier this year.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Exchange Rate<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Definition:<\/strong> The exchange rate is the value of one currency relative to another. For instance, \u20b985 per $1 means 85 Indian rupees are required to buy one US dollar.\n<ul class=\"wp-block-list\">\n<li>When the demand for the US dollar exceeds the demand for the rupee, the rupee weakens, and the dollar strengthens.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Function:<\/strong> It determines how much of one currency is needed to trade for another, crucial for international trade and investments.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Factors Responsible for Weakening Rupee<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Trade Deficit:<\/strong> India&#8217;s trade deficit widened to $26.83 billion in October 2024, indicating a higher demand for dollars to pay for imports. This contributes to the rupee&#8217;s weakness.<\/li>\n\n\n\n<li><strong>Capital Outflows:<\/strong> Foreign portfolio investors have pulled out a net amount of Rs 43,856 crore from Indian markets in 2024 so far (until December 20th), putting downward pressure on the rupee.<\/li>\n\n\n\n<li><strong>Stronger US Dollar:<\/strong> The US dollar index, which measures the dollar against a basket of major currencies, has risen by about 15% this year, reflecting the dollar&#8217;s strength and making other currencies, including the rupee, weaker in comparison.<\/li>\n\n\n\n<li><strong>High Inflation: <\/strong>India&#8217;s retail inflation has remained above the RBI&#8217;s target range of 2-6% for most of this year, reaching 6.77% in October. This higher inflation compared to many trading partners can make Indian exports less competitive.<\/li>\n\n\n\n<li><strong>Trade in Services:<\/strong> If Indians spend more on US services (like tourism) than Americans on Indian services, demand for dollars increases.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Impacts of a Weaker Rupee<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Costlier Imports: <\/strong>Crude oil prices have risen by over 10% this year, and a weaker rupee further increases the cost of importing oil, contributing to inflation and impacting household budgets.<\/li>\n\n\n\n<li><strong>Debt Burden:<\/strong> India&#8217;s external debt stood at $620.7 billion at the end of June 2024. A weaker rupee increases the cost of servicing this debt, putting pressure on government finances.<\/li>\n\n\n\n<li><strong>Outbound Travel: <\/strong>The cost of traveling to the US has increased significantly. For example, a trip that cost Rs 5 lakh a year ago would now cost around Rs 5.75 lakh due to the rupee&#8217;s depreciation.<\/li>\n\n\n\n<li><strong>Benefits for Exporters:<\/strong> A weaker rupee can make Indian exports more competitive in the global market, potentially boosting export-oriented industries.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Steps to Strengthen the Rupee<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Boost Exports: <\/strong>The government is aiming to boost exports through initiatives like Production Linked Incentive (PLI) schemes. India&#8217;s merchandise exports grew by 10.3% year-on-year in November 2024, indicating some positive momentum.<\/li>\n\n\n\n<li><strong>Attract Foreign Investment:<\/strong> The government has taken steps to improve the ease of doing business and attract FDI. India received $46.1 billion in FDI between April and September 2024.<\/li>\n\n\n\n<li><strong>Control Inflation:<\/strong> The RBI has been raising interest rates to combat inflation. However, inflation remains a challenge.<\/li>\n\n\n\n<li><strong>Diversification:<\/strong> India is exploring rupee trade with several countries to reduce reliance on the US dollar.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Conclusion<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The weakening of the Indian rupee is a complex issue with multiple contributing factors. While it presents challenges, it also offers opportunities for export-oriented industries. The government needs to continue its efforts to address the underlying causes, manage the negative impacts, and leverage the potential benefits of a weaker rupee.<\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-background\" style=\"background-color:#fff2cc\"><tbody><tr><td><strong>Daily Mains Practice Question<\/strong><br><strong>[Q] <\/strong>Discuss the factors influencing exchange rate fluctuations in India with a focus on the recent depreciation of the Indian rupee against the US dollar. Analyze its implications on India&#8217;s trade, inflation, and investment climate.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><strong>Source:<\/strong><a href=\"https:\/\/indianexpress.com\/article\/explained\/explained-economics\/indian-rupee-us-dollar-9736693\/\" target=\"_blank\" rel=\"noopener\"><strong> IE<\/strong><\/a><\/p>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/www.nextias.com\/ca\/wp-content\/uploads\/2024\/12\/UPSC-Editorial-Analysis-23-December-2024-PDF.pdf\">Download PDF<\/a><\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>The Indian rupee recently crossed the 85-mark against the US dollar, continuing a long-term trend of weakening relative to the dollar. A decade ago, this rate was \u20b961, and it was \u20b983 earlier this year.<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[22],"tags":[],"class_list":["post-34149","post","type-post","status-publish","format-standard","hentry","category-editorial-analysis"],"acf":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/34149","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=34149"}],"version-history":[{"count":3,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/34149\/revisions"}],"predecessor-version":[{"id":34181,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/34149\/revisions\/34181"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=34149"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=34149"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=34149"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}