Weakening Currencies around the world

On 19 July 2022, the Indian rupee surpassed a major milestone against the US dollar for the first time in history. In today's currency, $1 is equivalent to Rs 81.40. Concerns about the economy and the rupee's decline versus the dollar send a persistent message to the nation with many more countries facing the same issue as well. Some economists believe that although a weaker Rupee often causes more harm than benefit, it does not necessarily indicate that the Indian economy is in serious trouble.

Why is the Indian rupee falling against US Dollar?

The demand and supply factors affect how much the Indian Rupee is worth against the US dollar. The value of the rupee decreases as demand for the US currency rises. Currently, a rise in crude oil costs, a strong dollar abroad and ongoing international capital outflows are the key causes of the rupee's decline.

Since the beginning of the year, the rupee has been falling, particularly in the wake of supply chain interruptions brought on by the Russia-Ukraine war, global economic difficulties, inflation, and rising crude oil prices, among other problems.

Foreign institutional investors (FIIs) have sold shares worth $28.4 billion so far this year, surpassing the $11.8 billion sell-off that took place during the 2008 Global Financial Crisis. As a result, there have been huge outflows of foreign assets from local markets. To the dollar, the value of the rupee has decreased by 5.9 per cent this year.

Economic theory states that when a nation imports more than it exports, there will be a surplus of dollars rather than a shortage, which will result in a decline in the value of the domestic currency, such as the rupee in India, relative to the dollar.

In light of the recent interest rate increase by the US Federal Reserve, the return on dollar assets increased in comparison to those in developing nations like India. The US Federal Reserve has also aggressively raised interest rates, thus devaluing the rupee in India.

What about other currencies?

Although it has declined against the US dollar, the Indian rupee has gained ground against other major currencies including the Euro, British pound, and Japanese yen.

RBI increased the overseas borrowing limits for businesses and liberalized the rules for foreign investments in government bonds. The RBI relaxed regulations for foreign portfolio investments in the debt market and raised the External Commercial Borrowing (ECB) ceiling under the automatic route from $750 million or its equivalent each financial year to $1.5 billion. In addition, RBI increased its interest rates to maintain inflation within the limit.

Euro also equalled the Dollar on 12th July 2022. The dollar and the euro reached parity, showing that the market anticipates a significant decline in the European economy as a result of Russia's invasion of Ukraine. Currently, one euro is equivalent to one dollar. The shift will result in higher import costs for firms and consumers in Europe, while European exports will immediately become less expensive on international markets

How can currency value be controlled?

In a broader sense, a country must be essentially self-sufficient, have a strong local economy, and rely less on imports. Imports should be decreased and exports increased, developing friendly relations with neighbouring countries to reduce overall defence spending. This is only conceivable when the population is productive enough to support itself. At that point, the currency will continue to hold its value in the market because it won't owe any money to the rest of the world. It may be as valuable as the dollar or even more so, like the Euro.

The bank supremos of a country can change the money supply. For example, RBI achieves its control over the supply of money by altering the required Cash Reserve Ratio (CRR) for commercial banks. The current CRR is now set at 4.5%. A low CRR means banks have more money to lend and their cash reserves to increase. The opposite is true when the CRR limit is increased.

Printing more notes can also boost the money supply. More loans are given out when banks have more cash. People and companies then spend more (control overspending). Spending increases speed up GDP growth. Investment from abroad comes in. The demand for INR grows and becomes more powerful.

The government can change the Repo Rate as another tool for regulating inflation and economic activity. In times of low repo rates, banks borrow more money from the RBI. Banks lend more money to individuals and businesses when they have more money. By increasing spending nationwide, the government can raise more revenue. Spending more money also increases GDP growth (GDP & tax revenue). More foreign investments will flow into India when the country's GDP grows while the inflation rate is low. The Indian rupee gains strength as a result.