Depreciation Phenomenon of Rupee vs. Dollar: Speculation

When the demand for foreign exchange, such as USD, exceeds the supply in the forex market, the price of USD in terms of rupee rises. In other words, the rupee’s value will fall against the US dollar, which is referred to as rupee depreciation.

In a stock market, for example, if USD 1 can be acquired for INR 67, but its price rises to INR 68 after some time, the rupee is said to have depreciated by one rupee. If the price of the US dollar falls to INR 67 after some time, the rupee appreciates by one rupee.

To understand this phenomenon, we need to go back to the times India achieved independence.

The value of the rupee after independence:

 After independence, the value of one Indian rupee was almost equal to 1 USD, which was because India later had zero debit or credit on its sheets. But as such, India was ruled by Britain, and the value of 13 Indian Rupees was taken out to be 1 pound. And there was no such currency valuation system that could be considered standard. And as 1pound was equal to $2.73 in 1947 thus, the value of 1 Indian Rupee was assumed to be less than 1 USD, that is 1USD is equal to 4.76 rupees.  

After this, there were a series of events until 2016, when the government of India declared demonetization, which collectively affected the depreciation phenomenon of the rupee as compared to dollars. Let us see what all all-events lead to this major depreciation

• In the period between 1947 and the late 1950s, the state of the Indian economy was not in very good condition. Due to this, the country was under constant monetary help from the various global allies and powers.
• The rupee was decimalised in the year 1957
• The value of 1pound being equal to 1 rupee continues to the year 1966, which is when the Indian rupee started to experience devaluation in comparison to the USD due to the war and the drought going on in the country. As a result of this, the government of India had to devalue the Indian rupee to 1 USD = 7.50 rupees. This, in turn, had a great impact on export-import. The exports were now less as the value of the rupee was depreciated, and imports seemed to grow a lot in the country.
• In 1971, there was another economic disaster that took place: the collapse of the Bretton Woods Agreement. During this, the value of the rupee went down to 8.10, which was more of a consequence of the oil shock of the year 1973.
• There was another financial crisis in 1991. Due to the collapse of the greatest trade partner of the country, the export in the country fell by almost a big proportion, and this affected the valuation of the rupee as compared to the USD. The interests payable by the government grew up by 39% of the revenue generated, and the deficit had decreased to as low as 7.8% of the GDP of the nation. Due to this crisis, the value of 1USD in India grew up to 17.32 rupees. This was the actual depreciation of the Indian rupee.
• There was also a rupee fluctuation in the country during the 2000s. This promoted the depreciation of the rupee, thus making 1USD equal to 25.92 rupees. Also, by the year 2002, the depreciation had increased, and the rupee had now a value of 48.99 against the USD.
• And then, in 2009, the global financial crisis brought the depreciation to as low as 51.75 rupees against 1 USD. This led to the loss in the exports of the country

Now, after all these, there came the wave of demonetization in the country in 2016. The demonetization also played a role in the depreciation of the Indian rupee in the global market. This was as a sudden demonetization brought a big change in the strategies of investments and income and other aspects. The change in these above aspects depreciated the value of the Indian rupee to 68.77 against the USD. Then after, a few years from then and in the recent past from now, the pandemic hit the economy of the world, and the depreciation increased to 76.67INR against the USD.

Now to the question of why is there a fluctuation in the currency values:

The valuation of the currency in a country depends on its rate of supply and the quantity in demand. The total currency that is being circulated across the nation is the supply of the country. A rise in the demand for the currency or the lack of sufficient supply of the currency in the nation leads to a fluctuation in its exchange rate values. In the forex, the currencies of the countries in the world are sold according to the exchange rates of that nation, which is in turn related to the supply and demand of a currency in that nation.

Conclusion:

Thus we can see how the evolution of the depreciation of the currency of India took place as compared to the USD. There were and are so many factors that are involved in this depreciation, right from the independence to the wars, droughts, and demonetization in the country and also the pandemic and how they affected the depreciation rate of the Indian currency in the global market. We also saw how the currency fluctuates and how it affects the export-import of the country and the forex trade rates in the global community.