The CAD position and foreign reserves cause the rupee’s value to appreciate or devalue. Foreign investors play an important role in increasing a country’s reserve surplus. They will only invest if they believe there is value in a currency or market. The RBI’s interest rates also have an impact on investors. They prefer to enter high-interest-rate markets. Increased demand for our currency causes it to appreciate. On the other hand, if interest rates are low, the currency will depreciate.
Impacts of rupee weakening
Inflation
Because the inflation rate in the economy is already close to two digits, a depreciation of the rupee can have a negative impact on inflation. As imports become more expensive, fuel prices will skyrocket. Fuel price increases will have an impact on the prices of raw materials and other products, resulting in steady inflation in the economy. This will put a significant strain on the developing economy’s ability to grow. Inflation control will become a time-consuming task for the central bank and government.
Imports Will Be More Expensive
Due to the rupee’s depreciation, imports will be more expensive. India imports more than 70% of its crude oil requirements from various countries. Oil prices will rise in relative terms as the cost of importing fuel rises. The price of crude oil per barrel will rise as the Indian rupee continues to fall. However, it should be noted that exporters will profit because they will generate more revenue due to exchange rate fluctuations. As a result, exports will increase in India.
Corporate Rivalry
As a result of more expensive raw materials, Indian companies may face challenges in the global market because their production costs will be relatively higher than those of other countries. Competitors from other countries This will have an impact on the revenue generation of Indian companies when compared to their international rivals.
Influences foreign investment
Falling rupees will cause panic among Foreign Institutional Investors, who are concerned about the economy’s performance. This could result in FIIs withdrawing their investments from Indian markets. NRIs and other Indian nationals earning abroad, on the other hand, will be interested in investing in India.
However, there are some other advantages to depreciation that do not accrue directly. The depreciation of the rupee raises the cost of components and goods for businesses that rely on imports. It puts them at a competitive disadvantage in comparison to companies that are net exporters. While rupee depreciation appears to be painful in the short term, it may turn out to be a blessing in disguise for India’s manufacturing sector in the medium to long term.
A weaker rupee will encourage Indian firms to export more while also allowing them to replace some of the more expensive imported goods in the domestic market with local products. Thus, despite exacerbated ills such as inflation, rupee depreciation has benefits and can aid in the development of the economy’s manufacturing base.
