The Indian Rupee recently experienced a significant decline, of 17 paise, against the dollar on April 15th, 2020. This occurrence has generated increased levels of uncertainty surrounding the economy due to the ongoing Covid-19 pandemic.
Sharp Decline in Rupee Value
On April 15th, 2020, the rupee closed at a record low of 76.44 against the dollar, down from 76.27 the previous day. This significant decrease is an indication of the rupee’s diminished value compared to the dollar this year, equivalent to approximately a 7% depreciation. In fact, the rupee reached an intraday low of 76.55, a historical low.
This decrease in the value of the rupee implies that it has become less valuable relative to the dollar, indicating a noticeable depreciation. It currently requires more rupees to purchase a dollar than it did before, demonstrating the rupee’s decreased strength.
Reserve Bank of India’s Role
Despite these developments, experts have noted a lack of strong intervention from the Reserve Bank of India (RBI) to address the depreciating rupee. Predictions suggest that the RBI may only take action once the rupee breaches 77 to a dollar.
The RBI’s macroeconomic review suggests that if the rupee experiences a 5% depreciation from the baseline, which stands at Rs 75 per dollar, inflation could rise by 20 basis points (bps). This could potentially increase Gross Domestic Product (GDP) growth by approximately 15 bps through increased net exports.
The Impact and Causes of Currency Depreciation
Currency depreciation represents a decrease in a currency’s value within a floating exchange rate system. In such a system, market forces, including demand and supply for a currency, determine a currency’s value. Factors that can influence the value of a currency include inflation, interest rates, trade deficit, macroeconomic policies, and the equity market.
A decline in the value of a currency can stimulate export activity in a country by making its products and services more affordable to foreign buyers. On the other hand, it can also increase a country’s import bill if the domestic unit is weak.
Interventions by the Reserve Bank of India
The Reserve Bank of India has a variety of mechanisms available for intervening in the currency market to provide support to the rupee. One approach involves direct intervention in the currency market through buying and selling dollars. Selling dollars can serve to increase the rupee’s value, while buying can reduce its value.
Another method involves leveraging monetary policy to influence the value of the rupee. By adjusting the repo rate – the rate at which the RBI lends to banks – and the liquidity ratio, which refers to the proportion of money that banks are required to invest in government bonds, the RBI can control the rupee’s value.
Last Modified: February 7, 2024