Why is Indian Rupee falling against US Dollar?

Let’s get the fundamentals correct first.

US Dollar is globally accepted as a mean of international payment. So, when two countries get involved in the trade, they make transactions (or at least measure the sum) in USD. This means USD is usually high in demand by other countries. However, its supply is limited.

(Courtesy: Daily Hunt)

Now, if you apply the general demand-supply law, it’s evident that the price of USD will be high given its scarce supply. This is a very basic explanation.

Treat currency as a share that’s traded on a foreign exchange. People buy and sell it on a regular basis, which influences its demand and supply, and hence its strength and weakness against other currencies.

Now comes the question why one currency appreciates and depreciates against USD regularly? Here, we’re talking about Indian Rupee (INR). Well, it depends on an awful lot of factors.

Currently, here are few simple reasons why INR is depreciating:

• Export deficit: India imports more than it exports. This has caused a trade deficit on its balance sheet. This weakens its currency.

• Oil price: Crude oil price is rising, which has increased the demand for dollar (the currency every country deals in). This has negatively influenced INR.

• High manufacturing cost: We’re manufacturing at a highcost. But to be competitive in the global market, exporting at a low price. This has reduced USD inflow in the economy, which hurts INR.

• Inflation: When the price of goods are on the rise, the global investors and NRIs do not flow their money in the country. This adds pressure on INR.

• US-China Trade war: There’s a lot of uneasiness in the global market about US-China trade war. And this has put a negative pressure on the other currencies, including INR.

• FED rate hike: FED will likely increase the interest rate twice this year. This has led to many go into speculative buying, which has triggered the demand-supply law in favor of USD and against INR.

These are 6 top reasons that have set foreign exchange on fire, depreciating INR against USD. Of course, given the high complexity of open economy where one country’s welfare depends on many countries’ booming economy, how is India dealing with China, Pakistan, Middle-East and Japan are also playing a crucial role in the depreciation of Indian Rupee against USD.

(Courtesy: NDTV)

Also, given foreign investment is necessary to strengthen the domestic economy and currency against other countries’, internal political and social factors play an important role as well. India has failed to achieve desired FDI out of many big reasons.

INR has just hit its all-time low against USD. However, if the crude price continues to grow and US-China trade war escalates, Indian Currency can see itself in hot water. In fact, experts already believe that the worse is yet to come.