Why Rupee Is Falling Against Dollar?
Today in this article, we will be covering all the main reasons why Rupee’s value is going down these days. To set the context, when 1$ = X INR , it means we need to pay X INR to buy 1$ in open market. And say the next day we need to pay X+2 INR to buy 1$ then we will say that Rupee has fallen by 2 INR since yesterday.
First, Let’s find out how the value of rupee is decided against dollar?
In order to understand the answer of this question, we first need to understand 2 terms Pegging and Types of Exchange Rate (Fixed and Floating). So when we say a currency is pegged against dollar, it basically means that its value is directly proportional to dollar. So if say dollar’s value increases by x%, the currency’s value will also rise with the same margin. Coming to the second term, when we say a country follows Fixed exchange rate and pegged against dollar, we mean that the country will print more/less money but will try to keep it’s value fixed to dollar and when we say floating exchange rate, it means that it’s value will get defined by market supply and demand of that currency.
So now coming to our main discussion, Rupee is pegged against USD with floating exchange rate. So the supply and demand decides that how much rupees are required to buy an USD(refers as exchange rate). You must be wondering that why don’t we use the fixed exchange rate to avoid these rate fluctuations? Fixed exchange rates are generally used by countries with smaller economy. Also true value of a currency is only determined when it is traded in open market.
Top 3 reasons of this fall
There are multiple reasons of this fall and nobody can say that this is the exact reason but looking into factors and data, I have found out that these are 3 major reasons why rupee is falling.
US pulling USD back to their country
So you must be noticing that Indian stock market is also going down along with the value of rupee. Both of these things are somehow inter-related. To understand this better we have to go a little back, when first wave of the covid hits, the overall economy of every country started falling down. To manage this crisis US FED printed 3 trillion dollars in order to avoid major market crash. FIIs looked the opportunity in Indian stock market and start investing money continuously for many months, you may remember the rally in Indian market last year. But now due to monetary tightening in US, FIIs are finding the US debt markets more interesting to put money and hence they are pulling it out from Indian market which increases the demand of dollar than its supply, making dollar expensive.
Large Import Dependency
India has a large consumer base. We all know that in order to fulfill everyone’s basic needs we import a lot of goods from different countries. All these overseas transactions are generally done in US dollars and to make these purchases we have to buy dollars with rupees which leads to increasing demand of US dollars.
Russia-Ukraine war has created fuel and food crisis in the whole world. Due to which the price of fuel and food are raised. And as we have huge dependency on goods import, we are paying more price for the same quantity of goods to import. This is also called inflation in simpler terms which we will cover later in this article.
Should I panic? How will it affect me?
Well, there is no reason for now to panic for public. When FIIs were investing US dollars into indian market and were making rupee strong, RBI have reserved some US dollars for this day in advance. Every central bank do so in order to keep equilibrium in their currency rate. RBI already knew that there will be time when this money will get back into their origin countries which will lead Rupee to fall. So now with their dollar reserves, they will buy rupee from the US dollars in order to balance the supply and demand of rupee which will resist the fall in rupees value. 5–10% of rise and fall in the floating exchange rate is very common due to difference in supply and demand, so there’s nothing to worry about right now.
Coming to the second question, how will it affect you? The direct affect of this on general public will be inflation. We have to pay extra rupees to buy the same quantity of goods from different countries. So say a loaf of bread was of 1$. I have to pay 77.4 Rs. on 17 may 22 rather than 76 Rs. if I have bought it on 4 may.
There’s a good side of this as well but the affect of that is on a very low scale that nobody notices it. There are multiple low scale businesses and industries who exports their manufactured items in global market. With dollar being expensive they will get more rupees for the same goods and will get more earning.
That’s it with today’s article. Comment what would you like to read about next. I hope you have learned something new today. If so, can I get a clap 👏🏻?