Depreciation of Rupee

1. Depreciation of Rupee
By-
Srushti Rathod.
Prasad Manjrekar.
Rohit Keluskar.

2. What is in for me?
 Valuation of currency
 Factors that causes appreciation and depreciation of currency
 How rupee dollar rates are determined
 Causes for depreciation of rupee over the years
 Recent decrease in the valuation of rupee
 Reason for recent decrease
 Advantages and dis advantages of depreciation of rupee
 Measures the government can take to control the depreciation of rupee
 Measures RBI has taken to control the fall of rupee

3. Factors that causes appreciation and depreciation of
currency
 Relative Product Prices
 Monetary Policy
 Inflation Rate Differences
 Income Changes

4. Valuation of currency
 In 1947, Indian rupee was at par with US dollar as there were no Foreign
borrowings.
 In 1951, Govt introduced 5 year plan. To finance this, govt started external
borrowing which required devaluation of currency.
 India had chose Fixed rate currency regime. Rupee was pegged at 4.79 against
dollar between 1948 to 1966.
 Two consecutive wars with china and Pakistan 1962 & 1965 respectively,
resulted as huge deficit on India's budget forcing govt to devalue currency 7.57
against per dollar.
 In 1971, rupee and British pound link was broken and was linked directly to US
dollar
 In 1975, Rupee was devalued to 8.39 and in 1985 it was further devalued to 12
against the dollar.
 In 1991, India faced serious BOP crisis and forced to devalue sharply and forced
to 17.90 against dollar.
 In 1993, currency let free flow in market with market sentiment. This year
currency devalued to 31.37 against dollar.

5. In 1947,
1$=1rs.
1951, 5 year plan
Fixed rate
regime pegged
4.79/$ upto 1966
Devalued to 7.57/$
because of war
In 1971, british
pound link was
broken and linked
with USD
In 1975 & 1985
rupee devalued to
8.39 & 12
respectively
Serious BOP crisis,
devaled to
17.90/$
In 1993, currency
let free flow with
market
sentiments
In 2018,
depreciated
to 74.50/$

6. USD/INR Chart (2009-2018)
Source- www.xe.com

7. How rupee-dollar rates are determined?
 The value of a currency against another is based on demand. Greater demand
makes a currency stronger and vice versa.
 International Parity Conditions
 Balance of Payments
 Economic Policies of a government (Fiscal Policy, Budget, Investment policy
and Foreign Trade Policies) and a country’s central Bank (Cost of money,
interest rates, monetary policy)
 General macroeconomic conditions of the country
 inflation levels and trends
 Balance of Trade
 Market Psychology & perception

8. Recent decrease in the valuation of rupee

9. Causes for depreciation of rupee over the
years

10. Reason for recent decrease

11. Disadvantages of depreciation of rupee
 Depreciation strengthens inflationary forces. When the inflation rises, prices
of goods and commodities shoots up.
 The purchasing power of the rupee falls down.
 A depreciation of the domestic currency results in higher import costs for the
country. Failure of a similar rise being experienced in the prices of exportable
commodities is going to result in a widening of current account deficit (CAD)
of the country.
 Foreign Travel and Overseas Education becomes costlier.
 The interest burden would increase on foreign currency denominated debt.
 A large and rapid devaluation may scare off international investors. It makes
investors less willing to hold government debt because it is effectively
reducing the value of their holdings.

12. Advantages of depreciation of rupee
 Exports become cheaper, more competitive to foreign buyers. Therefore, this
provides a boost for domestic demand.
 Travel to India gets cheaper; local industry may benefit.
 Those working abroad can gain more on remitting money to their homeland.
 Ultimately, it assists in reducing the current account deficit.

13. Measures the government can take to control
the depreciation of rupee

14. Measures RBI has taken to control the fall of
rupee