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The Indian National Rupee (INR) entered its worst phase a few years ago when its value plummeted to an all-time low of 69 per dollar in August 2013. The situation improved gradually, and the rupee now trades at around 60 rupees per dollar.
A loss in the value of the rupee was never recognised when the rupee was devalued in 1991, mostly because the nation’s reputation was tarnished due to the devaluation.
India’s entry into the global economy occurred when LPG (Liberalisation, Privatisation, and Globalisation) was implemented in 1991, and a new era began. Market forces replaced the Reserve Bank of India’s fixed exchange rate in the 1990s, and the exchange rate became variable.
As India transitioned to a market economy, the methods to analyse the impact of changes in the Rupee’s value also shifted. It is now being examined in terms of its economic implications.
What Is Currency Convertibility? How Does It Work?
The ease with which a country’s currency can be turned into gold or another currency through worldwide exchanges is called convertibility. It shows how much capital can move into and out of the country due to such regulations. Non-fully convertible currencies, on the other hand, are complex to convert into other currencies.
Convertibility of currencies is an important aspect of global trade, as it allows trading with other countries.
A convertible currency enables a government to pay for products and services in a currency other than the buyer’s. A government’s ability to participate in the international market is hampered since nonconvertible currencies take longer to process.
Depreciation of the Rupee has Negative Effects on an Economy
When inflation grows, so do the prices of goods and commodities. As a result, the rupee’s purchasing power decreases.
A devaluation of the indigenous currency raises the country’s import costs. When a similar rise is not seen in the pricing of export goods, it deepens the country’s Current Account Deficit (CAD).
Travelling and studying abroad are becoming more expensive.
On debt denominated in any other currency, the interest load rises.
International investors may be chased away by a substantial and abrupt depreciation. Since it effectively lowers the value of their holdings, investors are less likely to hold government debt.
However, there are benefits to devaluation, and many companies applaud it
Exports become more affordable and competitive with overseas purchasers entering the scene. As a result, domestic demand gains traction.
Travelling to India becomes more affordable, and the local economy might benefit as a result.
Remitting money to one’s home country can increase one’s earnings.
In the end, it helps reduce the Current Account Deficit (CAD).
The demand elasticity of the commodities and services exported or imported determines the depreciated rupee’s ability to impact exports and imports. If oil imports are demand inelastic, i.e., the price of oil has little impact on its import demand, depreciation will have minimal impact on the Current Account Deficit (CAD).
However, many other advantages of depreciation are not directly derived. Rupee depreciation affects the cost of components and commodities for import-dependent businesses. Compared to net exporting businesses, this puts them at a disadvantage. While currency depreciation may be tough in the short term, it could be a boon to India’s manufacturing sector in the medium to long term.
A lower rupee will encourage Indian enterprises to export more while allowing them to substitute domestic goods for some of the more expensive imported goods on the domestic market. Despite mounting difficulties like inflation, rupee depreciation offers varied benefits and can help the economy’s manufacturing sector thrive.
Conclusion
While India has experienced rapid economic growth on many fronts, it has faced many challenges at the national and global levels, including the global financial crisis of 2008-09, inflation control issues, and nonperforming assets (NPAs). These events have affected the rupee’s fully convertible status. It will likely take another three to five years before the country is fully prepared for full rupee conversion.
