The Indian Rupee is losing value compared to the US Dollar. What’s going on?

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Infographic: Indian rupee hits record low against the dollar | Statista You will find more infographics at Statista 

The value of the Indian Rupee (INR) and some other countries’ currencies have been falling in value vs. the US Dollar (USD).

What does that mean? It is easier to understand if you look at the chart above. So in September 2017, 63.33 INR equalled 1 USD. And now, in September 2018, that value has shifted so that about 72 INR equals 1 USD.

Why is that?

1. India’s current account deficit (CAD) is widening.

What is the current account deficit?

current account deficit = imports – exports.

Why is it increasing? Oil prices are rising. The US is pressuring countries to stop importing oil from Iran as Mr. Trump has issued sanctions on Iran. He didn’t like the nuclear deal that had been struck and wants to rework its terms. Venezuela, another big oil producer, is in trouble economically so is not producing as much, neither is Libya. There is increased demand for the same supply from the other producers such as Saudi Arabia.

When we say that India’s CAD is widening, that means that it is importing more than it exports, and this difference is increasing. It spends money while importing or buying goods from another country, and earns money while exporting, or selling goods to another country. The higher oil prices have a direct impact on this as India imports a lot of oil.

2. The US economy is doing well: 

A reduction in tax rates in the US have fuelled faster growth in the US economy relative to Europe and the rest of the world. This has led to the US Dollar becoming stronger relative to other currencies.

The US Federal Reserve Bank has increased interest rates. This means that if you have 1 USD and put it into a savings account, you will earn more interest on it that you did 1 year ago. This is encouraging US investors who invest money around the world, including in India, to take their money back to the US.

3. The US – China trade wars are making people nervous. The US has imposed tariffs on many goods that it is importing, making them less attractive options when compared to US made products. These tariffs are likely to reduce world trade and therefore the circulation of US Dollars.

Where do we go from here? Mr. Arun Jaitley, the Finance Minister of India, is trying to figure this out. He has announced a few things that can be done to reduce the current account deficit, like importing fewer goods. Let’s see what happens…


Written by: Sunaina Murthy. Sunaina is a biotechnologist, writer, greedy reader, and amateur photographer.

 

 

 

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