Why Is Rupee Falling Against US Dollar?

Q. Why is  this in news? 

• The rupee recently dropped sharply against the US dollar, approaching the 75 mark. The currency was trading at around 74.86 per dollar down 0.33% from its previous close. The rupee has lost nearly 2.4% against the US dollar so far this year.
• However, The RBI based its growth and inflation forecasts for the Indian economy on the assumption that the exchange rate would be Rs 72.60 per US dollar.

Q. Why did Rupee drop To Eight-Month Low against the US dollar?

• One of the reason might be Reserve Bank of India's (RBI) massive bond purchase programme amid inflationary concerns, the Indian rupee fell to an eight-month low against the US dollar.
• Investors believe the RBI’s bond-buying plan will be negative for the currency due to inflationary concerns.
• Moreover, fears that a rapid revival of Covid cases in the country could derail the country's economic recovery also weighed on the rupee.
• The rupee witnessed pressure after RBI's announcement of $1 billion in bond purchases, the unwinding of carrying trades, the perception of a full lockdown due to rising cases, and panic buying by importers.
• Also narrowing interest rate differential between India and US could prompt some outflows from the Indian bond and equity market led to fall in rupee. 

Q. What is the impact of falling rupee? 

• The cost of imports rises when the rupee falls, putting the country's households at a disadvantage. 
• This has a negative impact on India's economy, which is based on imports. However, NRIs, of whom India has a large number, can profit from depreciating currency. 

Q. What is Currency Depreciation? 

Currency depreciation is a fall in the value of a currency in terms of its exchange rate versus other currencies. 

It can occur due to factors such as economic fundamentals, interest rate differentials, political instability, or risk aversion among investors.

• Currency depreciation is a fall in the value of a currency in a floating exchange rate system.
• Economic fundamentals, interest rate differentials, political instability, or risk aversion can cause currency depreciation.
• Orderly currency depreciation can increase a country’s export activity as its products and services become cheaper to buy.
• Currency depreciation in one country can spread to other countries.