The rupee is currently under stress as the rupee has depreciated by 3.2% against the dollar. And there are two important reasons for this, firstly the crisis between Russia and Ukraine and secondly the US is considering increasing its interest rates.
What is currency depreciation
When the value of a currency weakens in relation to another currency, through market forces such as the demand and supply of foreign currency, we call it currency depreciation. Similarly, if it weakens due to some administrative action, then we call it devaluation. Although the process of depreciation and depreciation are different, the results are the same. Till 1993, India followed devaluation but after that currency depreciation and currency depreciation depended on the market. China still follows the devaluation process.
What are the effects of currency fluctuations?
Currency fluctuations depend on the inflow and outflow of foreign currencies, which include external trade, foreign investment, two-way remittances and foreign aid. The rupee has been volatile due to the actions of foreign institutional investors since 1996, when India opened its capital markets. The depreciation that is being seen right now is the withdrawal of foreign institutional investors from the Indian market due to the decision of the Federal Bank of America to reduce the interest rate and the crisis between Russia and Ukraine. High oil prices and commodities are also an important factor.
On March 8, the rupee opened at ₹ 76.984 and after this, RBI handled this situation and did a swap auction of $5 billion on the same day. The rupee has depreciated 3.5% against the dollar and is the worst period since the 2008 economic crisis.
Under normal circumstances, depreciation helps exports. RBI has also stopped providing assistance to exports. India's import has been badly affected whether it is import of crude oil or other essential commodities. The price of crude oil fixed by OPEC countries is $127.93 per barrel, on March 8, the price of $ 1 was ₹ 76, due to which the price of crude oil was ₹ 9,836.53 per barrel, and on February 28, the price of $ 1 was ₹ 75, due to which Crude oil prices stood at ₹ 9,657.81 per barrel.
The effect of this whole episode will be on the economy in such a way that the current account deficit will increase, foreign exchange reserves will decrease and the rupee will weaken. Cost-push inflation will also increase due to rise in crude oil prices and increase in imports of other essential commodities. Simply put, this can increase the fiscal deficit even more.