Recently, the Indian rupee experienced a significant drop, depreciating below the 74 level against the US dollar. This article delves into the key reasons behind this trend, the implications of currency appreciation and depreciation, and how these factors are influenced by global events.
Depreciation of the Indian Rupee
The Indian rupee took a downward spiral as it depreciated by 16 paise to settle against the previously low August record of 73.87 against the US dollar. This decrease was largely attributed to a global shift towards risk aversion, wherein investors tend to favour lower returns with known risks over higher returns with unknown risks.
This time around, the stable US dollar appeared to be an attractive choice for investors, pulling them away from the rupee. The risk aversion is not only impacting the Indian currency but has also led to the US dollar making advances against other major currencies worldwide.
The Role of the Covid-19 Pandemic
Another significant factor interfacing with the global market is the ongoing Covid-19 pandemic. The recent surge in Covid-19 cases, particularly in Europe, has sparked fear across markets. Concerns that new lockdowns could cause further damage to the already fragile economic recovery process have magnified the risk aversion tendency among investors.
Understanding Currency Appreciation and Depreciation
In a floating exchange rate system, such as the one that determines the value of rupee, the forces of demand and supply play a pivotal role.
Currency appreciation refers to an increase in the value of one currency in relation to another. Several factors can trigger this appreciation, including government policy, interest rates, trade balances, and business cycles. However, currency appreciation may hamper a country’s export activity due to the relative cost increase of its products and services.
On the contrary, currency depreciation indicates a decline in the value of a currency under this system. Factors such as economic fundamentals, political instability, or risk aversion can instigate currency depreciation. In this case, the country’s export activity gets a boost as its products and services become cheaper for international buyers.
Depreciation as an Economic Strategy
Countries often willingly allow their currency to depreciate in order to encourage export activity, making their goods and services more affordable on the global market. However, it also means imported goods become more expensive, which can cause an increase in inflation.
The current depreciation of the Indian rupee, heavily influenced by global factors, is indicative of the intricate interplay of local and overseas economic factors. Understanding these fluctuations and the underlying influences is key to comprehending the global financial stage on which countries interact.
Conclusion
In summary, the depreciation of the Indian rupee below the 74 level against the US dollar can be traced back to global risk aversion, accelerated by the Covid-19 pandemic and its potential effects on economic recovery. This event underscores the importance of understanding both domestic and global economic trends, along with the dynamics of currency appreciation and depreciation in a floating exchange rate system.
