Brief Study About the Rupee vs. the Dollar Depreciation Phenomenon

The rupee depreciates when the value of the Indian Rupee (INR) falls in the foreign exchange (forex) market against another currency, such as the US Dollar (USD). While the Indian Rupee appreciates when the value of the INR increases against the USD. After independence, the government has devalued the Indian Rupee twice on purpose; once in 1966 and again in 1991. The devaluation of a currency refers to a government’s decision to formally lower the value of its currency.

Depreciation or Appreciation of Rupee at Work

When the demand for foreign exchange, such as USD, exceeds the supply in the forex market, the price of the USD in terms of the Indian Rupee rises. In other words, the Indian Rupee’s value falls against the US Dollar, which is referred to as the depreciation of the INR.

For example, if USD 1 can be traded for INR 67 on a stock market, but its price increases to INR 68 after some time, the Indian Rupee is said to have depreciated by 1 Rupee. If the price of the US Dollar falls to INR 67 after some time, it means the Indian Rupee appreciated by 1 Rupee.

Interest Rate

The interest rate is an amount a lender charges a borrower on the principal, i.e., the amount borrowed. The interest rate on a loan is referred to as the Annual Percentage Rate (APR). The money acquired through a savings account or a Certificate of Deposit (CD) at a bank or credit union can also yield interest. The Annual Percentage Yield (APY) is the amount of money earned on these deposit accounts.

1. The interest rate is the amount that a lender charges a borrower for the use of assets in addition to the principal amount.
2. The interest rate also pertains to the money generated from a deposit account at a bank or credit union.
3. Simple interest is used in the majority of mortgages. On the other hand, compound interest is applied to the principal, along with the accrued interest from earlier periods on some loans.
4. A lender will charge a lower interest rate to a borrower who is categorised as low risk.

Simple Interest Rate

The formula of simple interest rate is given as:

Simple Interest= principalinterest ratetime

If the loan taken by a borrower is for 30 years at an interest rate of 4% and the principal amount is Rs. 300,000, the interest payment that the borrower will need to make is:

Simple interest=Rs.300,0004%30=Rs.360,000

An annual interest rate of 4% equals a payment of Rs. 12,000 in interest per year. Thus, the borrower would pay Rs. 12,000 x 30 years = Rs. 360,000 in interest payments after 30 years. This is how banks generate money.

Compound Interest Rate

The formula to calculate compound interest is given below:

Compound Interest=p(1 + interest rate)n-1

Where p=principal and n= number of compounding periods

Some lenders favour compound interest, which means the borrower will be required to pay even more interest. Compound interest, often known as interest on interest, is calculated not just on the principal but also on the accrued interest of the previous periods. In this case, banks expect the borrowers to pay the principal plus interest for the first year at the end of the year. When the second year concludes, the bank expects borrowers to pay the principal plus the first year’s interest plus the first year’s interest on interest.

FD Rate of Interest

A fixed deposit or an FD is an investment instrument offered by banks and Non-banking Financial Companies (NBFCs) to their customers. An FD allows people to invest a certain sum of money for a fixed period at a predetermined rate of interest. This rate of interest may vary from one financial institution to another and is usually higher than the interest offered on savings accounts.

Fixed deposits are available for different periods, ranging from short-term tenures of 7–14 days to long tenures of 10 years. A fixed deposit is also referred to as a term deposit.

Fixed deposits are a safe and protected investment choice, as they ensure steady interest rates.  They remain unaffected by market changes. Studying the latest FD interest rates of the top banks in the country is crucial before opening a new FD account or renewing a current FD. Here are the most recent FD rates of interest in 2022:

• Best FD Rates in India: IDFC Bank offers the highest FD interest rate at 6% p.a., which is for a residency of 5 years or more for the overall population. For senior residents, the financing cost depends on 6.50%.
• The second-most elevated loan cost is 5.75% p.a. which Axis Bank presents for five years or more residency.
• The third-most noteworthy loan fee being offered is 5.60% p.a. HDFC presents this for a residency of 5 years or more.
• Best FD Rates in India among Popular Banks: The most elevated FD rate among the famous banks in India is 6.25% p.a. which YES Bank gives for residencies going from 5 years to 10 years for the overall population.
• For senior residents, the most noteworthy FD rate among well-known banks in India is 6.50%, given by Yes Bank for residency going from five years and ten years.

Rate of Interest Formula

The interest rate, which is a percentage of the principal amount, charged by the lender or bank to the borrower for the use of its assets or money for a specified time period may be calculated using the interest rate formula.

Interest rate formula=(Simple Interest100)(Principal Time)

The below equation can determine the loan cost for a given sum on compound interest,

Compound Interest Rate=P(1+i)t-P

Conclusion 

The Indian currency’s volatility is due to a number of causes. Because India imports a huge amount of crude oil, crude oil prices have a major impact on the value of the INR. The value of the Indian rupee depreciates when oil prices rise. As previously mentioned, a drop in foreign investments in the Indian economy, interest rates, and inflation all contribute to the INR’s devaluation versus the dollar. Currency depreciation raises the cost of imported products, international travel, and study abroad costs.