Currency devaluation against the US dollar refers to a decline in the value of a country’s currency relative to the USD. This often leads to an increase in the cost of imports and a decrease in the domestic purchasing power. Many factors contribute to the devaluation of a currency, including global economic conditions, inflation, trade imbalances, and political events.
Recently, the Indian rupee (INR) has been experiencing a decline against the USD, causing concerns about the economy’s stability and the rising cost of living for ordinary citizens.
In this context, we explore the reasons behind the fall of the INR, potential consequences, and whether the rupee could breach the 90 mark against the dollar.
Reasons for the Fall of INR
Several factors have contributed to the falling INR against the USD. One significant reason is the US Federal Reserve’s decision not to cut interest rates on US sovereign bonds, maintaining higher yields on US assets, thus attracting capital inflows into the US.
Trump’s repeated threat of 100% tariffs on trade with BRICS nations has caused global uncertainty, making foreign investors wary. Additionally, poor domestic stock market sentiment has discouraged both foreign and domestic investors, contributing to the weaker INR.
With the US dollar continuing to strengthen globally, the INR could face further pressure. While the Fed’s stance and geopolitical tensions have led to capital outflows, it’s difficult to predict if the INR will breach the 90 mark against the USD.
Experts suggest that India’s fiscal policies, foreign reserves, and export growth will play crucial roles in stabilizing the rupee in the near future. But if these macroeconomic factors persist, a further slide in INR value might not be ruled out.
Negative Impact of INR Devaluation
Higher Import Costs
A falling INR leads to higher import costs, especially for essential goods such as crude oil, gold, and industrial machinery. As the value of the rupee declines, India’s importers face increased expenses in USD terms, which subsequently gets passed onto consumers in the form of higher prices. This affects industries reliant on foreign raw materials and could result in inflationary pressure, increasing the overall cost of living.
Diminishing Purchasing Power for Indians
As the INR weakens against the USD, there is a diminishing purchasing power for Indian consumers, particularly for imported goods. Foreign travel, luxury items, and even foreign services become costlier, straining household budgets. The depreciation of the rupee affects the
average Indian’s ability to afford foreign products and services, further limiting discretionary spending and leading to a reduction in quality of life for many.
Positive Impact of INR Devaluation
Higher Exports
A weaker INR can boost exports as Indian goods become cheaper for foreign buyers, making them more competitive globally. This can benefit sectors like textiles, chemicals, and engineering products, encouraging increased export activity. With a lower exchange rate, Indian exporters can see higher demand, potentially improving the country’s trade balance and supporting economic growth.
Higher Net Remittance from Abroad
The devaluation of the INR can lead to higher net remittances from abroad. For Indian expatriates working in countries where the currency is stronger than the rupee, sending money back home becomes more valuable. This increase in remittances can provide a boost to India’s foreign exchange reserves and improve the country’s current account balance, helping to offset some of the negative effects of currency depreciation.
Written By: Dipangshu Kundu
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