ECONOMY UPDATE – Rupee Depreciation

What causes the rupee to depreciate?

Reasons which cause the rupee to fall in comparison to dollar are:-

  • Demand supply Rule The value of rupee follows the simple demand and supply rule of economics. If the demand for the dollar in India is more than its supply, dollar appreciates and rupee depreciates.
  • Dollar gaining strength against the other currencies The central banks of Euro zone and Japan are printing excessive money due to which their currency is devalued. On the other hand, US fed has shown signs to end their stimulus. Hence, making the US dollar stronger against the other currencies including the India rupee, at least in the short term.
  • Oil prices Oil price is one of the most important factors that puts stress on the India Rupee. India is in the unhappy situation where it has to import a bulk of its oil requirements to satisfy local demand, which is rising year-on-year. In International markets, prices of oil are quoted in dollars.
  • Volatile domestic equity market Our equity market has been volatile for some time now. So, the Fll’s are in a dilemma whether to invest in India or not. Hence they may be pulling out of the market.
  • Central Bank Role Global central banks have build euro firewall and have thus shrunk dollar supplies thereby creating a $2 trillion shortage for companies worldwide
    We all must have talked a lot about the disadvantages off rupee depreciation, but for a change lets discuss some of the advantages.

Benefits of Rupee Depreciation

  • Advantage to Exporters and NRI’s Weakening of rupee gives up a huge advantage to the exporters by increasing their realization. Further the time is right for NRI’s to remit their funds for investment in India as one can-not deny the long term growth prospects of this country.
  • Boom to tourism industry Travel and tourism is a sector which will benefit from the depreciation of the rupee as the travel cost would be a lot cheaper to the foreign nationals.
  • Boom to Real Estate industry If the rupee maintains its current levels, developers could see more interest from NRI buyers as long as the capital value levels are also maintained and do not see big hike during the period.
  • Disincentives the imports Due to such high dollar prices, people may no more be tempted to import goods and thus it may give a chance for the domestic industry to develop and produce some new commodities.

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Financial Management