[Answered] The rupee value has been on the decline since early this year. What are the factors that are contributing to the fall of the Rupee value? Also, highlight the implication of the fall of the Rupee value for the economy.

Rupee depreciation means that the rupee has become less valuable with respect to the dollar. It means that the rupee is now weaker than it used to be earlier. The rupee has been staggering since the beginning of the year and has fallen nearly 4 percent so far.
Factors that are contributing to the fall of the Rupee value:

• High current account deficit: The trade deficit in June, for instance, expanded to $25.6 billion and the current account deficit (CAD) is expected to cross 3 per cent of gross domestic product this fiscal year.
• Large outflows on the capital account: Foreign portfolio investors (FPIs) have been selling Indian assets for a while. It is due to rising risk aversion in the global financial system and increasing interest rates in the US.
• Higher domestic price inflation: Higher inflation in India suggests that the RBI has been creating rupees at a faster rate than the U.S. Federal Reserve has been creating dollars.
• With crude oil prices soaring to record highs in wake of supply restrictions, India which is the third largest importer of oil in world, witnessed a significant rise in its import bill.

Implications for the economy:

• The falling rupee is most likely to impact spending decisions of households as certain things may become expensive.
• Weaker rupee should theoretically give a boost to India’s exports, but in an environment of uncertainty and weak global demand, a fall in the external value of rupee may not translate into higher exports.
• It poses risk of imported inflation, and may make it difficult for the central bank to maintain interest rates at a record low for longer.
• India meets more than two-thirds of its domestic oil requirements through imports.
• India is also one of the top importers of edible oils. A weaker currency will further escalate imported edible oil prices and lead to higher food inflation.
• In terms of remittances, or the money that people residing abroad send to their families back home in India, it would cost more as they will end up sending more in terms of rupee.

If India wants a stronger rupee, then India needs to do a better job of managing the economy such as Inflation control, productivity improvement, etc.  It is natural that this loss in the rupee’s domestic purchasing power should get reflected in a lower exchange rate.