Recently, the Indian rupee’s exchange rate against the US dollar has breached the 85 mark.
- Exchange rate represents the value of one currency relative to another, essentially serving as the price of one currency expressed in terms of another.
key Factors Responsible for Rupee’s Depreciation
- Strengthening of the US Dollar: US Federal Reserve's aggressive monetary tightening has promoted capital outflows from emerging markets.
- E.g. Outflow of Foreign Portfolio Investment (FPI) from India
- Widening Trade Deficit: Driven by higher crude oil imports
- Other: High Inflation in India (when inflation rates are high, the value of the currency typically depreciates), etc.
Impact of Rupee’s Depreciation
- Negative Impact
- Higher Import Costs: A weaker rupee makes imports more expensive, particularly for crude oil.
- It further leads to the widening of Trade Deficit.
- Others: Increased cost of foreign debt, pressure on inflation etc.
- Higher Import Costs: A weaker rupee makes imports more expensive, particularly for crude oil.
- Positive Impact
- Boost to Exports: Goods and services become more competitive in international markets due to lower prices in dollar terms.
- Higher Remittance Value: NRIs sending money back home benefit from higher rupee value.
Measures can be taken to Stabilise the Rupee
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