DEPRECIATION OF RUPEE (Syllabus: GS Paper 3 – Economy)
Context: The rupee has fallen to a new low of 83.5 against the dollar.
Depreciation of Rupee
- About: It refers to the decline in the value of the Rupee compared to the dollar, indicating that the Rupee has decreased in worth and strength relative to the dollar.
- Reasons for the fall:
oGeopolitical Instability: It impacts investors, triggering a chain reaction affecting currency value.
oConflict Escalation: The Iran-Israel conflict, alongside ongoing Israel-Palestine and Russia-Ukraine conflicts, threatens global supply chains.
oSupply Chain Disruption: Conflict escalation could disrupt global supply chains, leading to increased commodity prices and fueling inflation.
oInflationary Pressure: Rising commodity prices contribute to inflation, diminishing the likelihood of a US Fed interest rate cut.
oImpact on Interest Rates: Diminished chances of a US interest rate cut prompt investors to move funds to the US, affecting global financial flows, including those to India.
Impact of Weaker Rupee on Indian Economy
- Imports Become Costlier: A weaker rupee results in increased costs for importing goods and services into India.
- Benefit for Exporters: Exporters gain an advantage as their goods become more competitively priced in international markets.
- Broad Range of Affected Products: Various sectors, including electronics, machinery, plastics, and chemicals, face higher prices due to the depreciation of the rupee.
- Direct Impact on Oil Prices: The weakening of the rupee directly influences the cost of imported oil, affecting energy prices domestically.
