Why is the rupee falling?

Recently we have witnessed the decrease in the value of rupee against the US dollar .There are several reasons that are responsible for the depreciation in the value for the Indian currency.The value of currency increases or decreases with factors that affect the economy such as imports and exports,inflation,growth rate, performance of equity markets,foreign investment inflows, commodity prices and geopolitical conditions.

When income of people increases,they tend to spend more money which in turn increases the demand of commodities.Higher demand for imported goods increases the demand for foreign currencies,thus weakening  the local currency.

India imports more goods than it exports ,which causes huge imbalance in trade also known as trade deficit which results in strengthening the currency of the country from which the goods are imported .Another factor is the difference in interest rates between countries. Let us consider the recent RBI move to deregulate interest rates on savings deposits and fixed deposits held by non-resident Indians (NRIs). The move was part of a series of steps to stem the fall in the rupee. By allowing banks to increase interest rates on NRI rupee accounts and bring them on a par with domestic term deposit rates, the RBI expects fund inflows from NRIs, triggering a rise in demand for rupees and an increase in its value.

High inflation is also one of the reasons in the decreasing value of money.Prices of commodities rise when either goods or services are scarce or money is in access supply.The increase in prices indicates that the purchasing power of money has decreased resulting in reduced consumption of commodities,imports becoming costlier and loss of industrialists.

Only the prices of oil have remained majorly benign this year ,which might keep some pressure off the rupee but may not be able to save it from falling. The falling value of rupee is definitely not a good sign for Indian economy.

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