The rupee reached an all-time low of ₹85.81 per U.S. dollar in December 2024, marking a 3% depreciation in 2024.
The value of a currency depends on its demand and supply in the foreign exchange (forex) market.
A higher supply or lower demand for a currency compared to another leads to depreciation.
Central bank policies, trade dynamics, and foreign investor sentiment significantly influence these factors.
Factors Behind Currency Depreciation
1. Monetary Policy and Inflation:
Looser monetary policy by the Reserve Bank of India (RBI) compared to the U.S. Federal Reserve increases the supply of rupees in the market, weakening its value.
Higher inflation in India relative to the U.S. reduces the rupee’s purchasing power, contributing to its depreciation over the long term.
2. Foreign Investor Behavior:
Investors withdrew funds from Indian markets as global central banks recalibrated monetary policies post-pandemic.
Money moved to advanced markets, where monetary conditions or returns are more favorable.
3. India's Trade Dynamics:
India’s high demand for imports like crude oil and gold increases the demand for dollars, leading to rupee depreciation.
Sluggish export growth limits foreign demand for the rupee, exacerbating the issue.
4. Central Bank Intervention:
The RBI has been using foreign exchange reserves to stabilize the rupee by increasing dollar supply.
This effort reduced reserves from $700 billion in September 2024 to $640 billion in December 2024.
Without such intervention, the rupee might have depreciated further.
Broader Implications For the Economy:
A weaker rupee makes imports more expensive, increasing costs for oil, electronics, and other goods.
Depreciation could make Indian exports cheaper globally, potentially boosting trade, but only if supply-side issues are addressed.
The RBI’s gradual depreciation strategy aims to avoid sudden volatility, which could disrupt businesses and markets.
Persistent depreciation highlights structural economic challenges, such as reliance on imports and inadequate export growth.
Way Forward
To stabilize the rupee and strengthen the economy:
Policies should enhance export capacity and competitiveness.
Reducing import dependence, especially on energy and gold, could ease forex demand.
The RBI must align inflation control with currency stability to ensure sustained economic growth.
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