Dynamics of Rupee Depreciation and Its Economic Implications

What Does “Rupee Depreciation” Mean?

Imagine you could buy 1 US dollar for ₹75 last year, but now you need ₹85 to purchase the same dollar. This indicates that the rupee has weakened or “depreciated,” meaning you require more rupees to obtain the same amount of dollars.

Why Is Everyone Talking About It Now?

The rupee has been losing value against the US dollar recently, which has raised concerns. However, a weaker rupee is not always detrimental; in some circumstances, it can actually benefit India’s economy.

The Good Side: Why a Weaker Rupee Can Help India

• Makes Indian Exports Cheaper and More Competitive: A weaker rupee acts like a discount for foreign buyers. For instance, if an Indian shirt costs ₹1,000:
  • When ₹75 = $1 → Cost is $13.33
  • When ₹85 = $1 → Cost is $11.76
  This makes Indian products more affordable, boosting export demand.
• Helps India Compete With China: China intentionally keeps its currency weak to lower its export prices. A strong rupee makes Indian products appear more expensive, while a weaker rupee enhances India’s competitiveness in global markets.
• A Natural Economic Adjustment: When the US economy performs well, the dollar typically strengthens. Allowing currency to adjust naturally is often more beneficial than attempting to resist the trend.
• Helps Reduce India’s Trade Deficit: A weaker rupee:
  • Increases import costs, leading to reduced imports.
  • Decreases export prices, encouraging foreign purchases.
  This fosters a more balanced trade structure.

The Bad Side: Problems Caused by a Weaker Rupee

• Foreign Travel Becomes Costlier: For example, a $100 hotel room that cost ₹7,500 now costs ₹8,500, meaning more rupees are needed for the same expenses.
• Imported Goods Become Expensive: Items such as iPhones, electronics, crude oil, petrol, gold, medicines, and foreign education all become pricier in rupee terms.
• Can Lead to Inflation: Higher crude oil prices can elevate transportation costs, potentially increasing overall price levels.
• Companies With Foreign Loans Suffer: If a company borrowed $1 million at ₹75, it owed ₹7.5 crore. At ₹85, it owes ₹8.5 crore, an increase of ₹1 crore solely due to currency depreciation.

Should the Common Person Panic?

For most Indians, the impact is minimal because:

• Daily life is transacted in rupees (salaries, groceries, rent).
• Most people do not frequently travel abroad.
• Most daily-use products are manufactured within India.

What Should the Government Do?

Experts recommend that the government should avoid aggressive interventions to maintain an artificially strong rupee. The RBI should:

• Allow the rupee to find its natural level.
• Intervene only during panic or sudden crashes.
• Avoid depleting foreign reserves to defend the currency.

Real-World Example

Scenario 1: Strong Rupee
Indian product: $15, Chinese product: $12. Outcome: Customer buys from China.
Scenario 2: Controlled Rupee Depreciation
Indian product: $12, Chinese product: $12. Outcome: India becomes competitive.

The Bottom Line for the Common Person

While rupee depreciation may make foreign goods and travel more expensive, it also strengthens India’s exports, enhances the competitiveness of Indian companies, creates more jobs, and supports long-term economic growth. Consider it as temporary discomfort that ultimately benefits the economy’s health.

Frequently Asked Questions (FAQs)

Q1. What is rupee depreciation?
Answer: Rupee depreciation refers to the decline in the value of the Indian rupee against other currencies, making imports more expensive and exports cheaper.

Q2. How does a weaker rupee affect exports?
Answer: A weaker rupee makes Indian goods less expensive for foreign buyers, boosting demand for exports and helping to improve trade balances.

Q3. Why is a weaker rupee not always bad?
Answer: It can enhance export competitiveness, reduce trade deficits, and stimulate economic growth, counterbalancing potential negatives like inflation.

Q4. How does rupee depreciation impact inflation?
Answer: Depreciation can lead to higher import costs, especially for oil and essential goods, potentially contributing to inflationary pressures in the economy.

Q5. What should the government do about a depreciating rupee?
Answer: The government should allow the rupee to adjust naturally while intervening only in cases of extreme volatility, maintaining economic stability.

UPSC Practice MCQs

Question 1: What is one effect of rupee depreciation on exports?
A) Exports become more expensive
B) Exports become cheaper
C) Exports remain the same
D) Exports decrease only
Correct Answer: B