Most of you have seen or heard that “Today rupee opened on a low note, at Rs. 70 against the US dollar” or “Rupee depreciate in value against the US dollar”. Have you ever thought that why it is falling? And who decided the value of Rupee as Rs. 70 per 1 USD.
Most importantly, how this depreciation or devaluation in rupee value affect the imports and exports? Well, if you have no idea then don’t worry! In this article, we are going to discuss the reasons behind all this.
So, let’s start with –
Who fixes the value of the Indian Rupee against the US Dollar?
You probably wondering “it is our government who fixes all that”.
Well, certainly not!
Or maybe Reserve Bank of India (RBI)?
Truth to be told, it is the currency market that determines the value of Indian rupee or any other currency. The demand and supply is the main reason behind the price of each currency. So, if the demand of Indian rupee is high, the rupee will appreciate but on low demand, it will depreciate.
If it is the sole market which forces the currency value then this is called a Floating Rate System. However, India has adopted the partial floating rate system since 1975 and fully depend on it since 1993. If the government can fix the exchange rate of currency according to them not the demand and supply forces in the market then such a system called the fixed rate system.
That means, our Prime Minister, RBI Chairperson, and Finance Minister can’t fully control the exchange rates but do have some control over it through monetary policies, interest rate decisions, and controlling exchange rate reserves.
So, if the currency falls under the fixed rate system it is called devaluation but if the currency falls under the floating rate system it is called depreciation. In 1947, the One rupee was equal to one dollar but now 70 rupees is equal to one dollar.
So, the change in Indian rupee does really affect the economy of a country?
At present, what troubles our ministers and RBI governor is not the depreciation but the fluctuation in the currency market.
Fluctuation in Rupee Prices: Relation with Imports & Exports
How does a fall in rupee affect imports and exports?
Before we answer this, you need to know that why do governments devalue their currencies?
It is because to improve the trade balance. Means, increase exports and decrease imports.
So, let’s come to the point. If the rupee devaluates then the more local currency is needed for importing goods and exporters get more local currency. In short, the imports become more expensive, and exports become cheap.
This is to reduce the trade deficit and encourage exports more than imports. It is not just the local currency but in terms of volume, as well. For instance, let’s assume America imports a product XYZ from India which cost it $1/item before devaluation but after devaluation it costs only 50 cents per item. In that case, America will take this opportunity which will ultimately benefit the Indian exporters.
Hope, this article helped you in understand the influence of fluctuation in rupee prices on imports and exports. Nevertheless, for any query please leave a comment.