In December 2024, the Indian rupee fell to a record low of 85.81 against the US dollar, meaning it took more rupees to buy one dollar. This was a 3% decrease in the rupee's value compared to the previous year.
Here's a simplified explanation:
What is currency depreciation? When a currency loses value compared to another currency. In this case, the rupee became worth less compared to the dollar.
What determines a currency's value?
Supply and Demand: Like anything else, the value of a currency depends on how much of it is available (supply) and how much people want it (demand). If more people want a currency, its value goes up. If fewer people want it, its value goes down.
Central Banks: Central banks (like the Reserve Bank of India or RBI) can influence the supply of money through their policies.
How do central banks affect currency value?
Looser Monetary Policy: When a central bank makes it easier to borrow money, it increases the supply of that currency. This can lead to the currency becoming less valuable.
Tighter Monetary Policy: When a central bank makes it harder to borrow money, it decreases the supply of that currency. This can make the currency more valuable.
How does foreign demand affect currency value? If foreigners want to buy goods or invest in a country, they need to buy that country's currency. This increases demand for the currency and makes it more valuable. If foreigners are less interested, demand decreases, and the currency becomes less valuable.
Why did the rupee decline?
Foreign Investors Selling Indian Assets: Foreign investors were taking their money out of India, which reduced demand for the rupee.
Global Monetary Policy Changes: Changes in monetary policy around the world made some currencies more attractive than the rupee.
High Inflation in India: Prices were rising faster in India than in the US, making the rupee less attractive.
RBI's Monetary Policy: The RBI's policy of making money more readily available also contributed to the rupee's decline.
How do inflation and imports affect the rupee?
High Inflation: When prices rise quickly in India, it makes the rupee less valuable.
High Imports: India imports a lot of expensive goods like oil and gold, which requires buying US dollars. This increases demand for dollars and weakens the rupee.
Weak Exports: If India doesn't export enough goods, there is less demand for rupees from other countries.
What has the RBI done to try to support the rupee? The RBI has used its reserves of US dollars to buy rupees, which increases demand for the rupee and can help stabilize its value. However, this has reduced India's dollar reserves.
Key Facts:
The rupee hit a record low of 85.81 against the dollar.
RBI reserves dropped from $700 billion to $640 billion.
Changes in global monetary policy influenced foreign investment.
Inflation is higher in India than in the US.
The RBI prefers a gradual depreciation of the rupee.
What is the outlook for the rupee? Experts believe that without the RBI's actions, the rupee's decline would have been worse. The rupee's value will continue to be affected by India's economy and global market conditions.
In simple terms: The Indian rupee has become weaker compared to the US dollar. This is mainly because of investors taking money out of India, global economic changes, and higher inflation in India. The RBI is trying to support the rupee, but the situation is complex.