Why and how does a currency’s value fall?
To understand the effects of the depreciation of currency on the economy, we must first determine the cause of depreciation of a currency.
Inflation can be stated as one of the major causes of the devaluation of the currency, inflation is when the value of money decreases and the demand and supply of products increases and their prices increase. As a result, people resort to imports which lead to an increase in imports (dealt with in USD generally) which implies the demand of dollar against the demand of rupee increases, i.e USD> INR.
Now, exports for India are bound to increase as people who were selling products and services in the foreign countries will get higher value for their offerings. For example, the product that was worth USD 10 (INR 67.85) on 24th June 2018 had a higher value for the exporter on 10th October when the Indian Rupee was valued at INR 74.60 against USD. But imports for India will become more and more expensive and restricted as rupee will have to be paid in double or tripe or many folds increased, depending upon its fall.
Hence, getting a good forex and currency tips and hedging against the forex risk is vital for the exporter and importers. There are many reputed advisories on which traders can rely on, one of them is Shyam Advisory.
Another reason for currency depreciation can be when a country’s imports exceed its exports, which leads to low demand for the country’s goods and services which in turn results in depreciation of the currency.
Another factor is when the RBI imposes monetary policies that cause a sudden change in the currency value of rupees in order to deal with inflation more effectively.
Global economic forces also impact a currency’s appreciation or depreciation. For example, if India is in a state of recession, its currency will depreciate against those of stable economies.
How does it affect trade?
A significantly weaker currency will, theoretically, increase exports of a country and decrease imports, leading to lower trade deficits of a country over time, and an increase in the surplus(if the export and import ratio stays stable). But, in an import based country like India, imports are always going to be higher than exports regardless of how expensive imports can become unless the RBI restricts imports inflow. Due to this highly unbalanced trade, the value of rupee keeps falling and the value of the dollar keeps increasing as we are dependent on it.
If exports are greater than imports then the country achieves a trade surplus which contributes to the economic growth of a country. But in India, we have been in a constant state of trade deficit over many years and that has accounted for the stunted economic growth of the country.
How does it affect investment?
The INR being highly volatile currency adversely affects investments. With a prenotion of INR to become cheaper still in the near future, the foreign institutional investor inflow (FII) has decreased due to the uncertainty surrounding debts and equity returns as an undetermined or unpredicted change in currency can cause their debt holdings to prove costlier than they would expect.
On one hand, depreciation of currency can be beneficial to companies that focus on exports as Indian goods will be cheaper and buyers will become interested in buying more goods for less cost.
In both cases, whether it is appreciation or depreciation in the value of the domestic currency, direct exporter, importers and business that get impacted by the fluctuation in the currency should opt for currency tips from Shyam Advisory.
On the other hand, imports of already expensive goods such as crude oil, petroleum and the likes of them are bound to get costlier in the near future if the downward spiral of rupee’s value doesn’t come to a halt.
While the depreciation of the value of rupee proves to be beneficial for export-based companies, almost every other sector of the economy gets negatively affected by this rather constant and frequent change (decrease) in the value of the currency.
Additionally, it may be theoretically correct to consider that India is better off with a lower rate of rupee so that it helps with increasing exports, it is not as near to being true in the practical reality as an economically backward country, India primarily depends on imports. Which leads to imports overshadowing exports almost always and resulting in a considerable trade deficit.
Even if the RBI takes steps to bring this constant depreciation of the currency under control, the main factors that majorly affects the exchange rate are global economic market forces against which, there is little a government can actually do.