Explained: What Rs 80 to a dollar means

Source: The post is based on the article “Explained: What Rs 80 to a dollar means” published in Indian Express on 20th July 2022.

What is the News?

The Indian rupee has breached the psychologically significant exchange rate level of 80 to a US dollar in early trade.

What is the rupee exchange rate?
Rupee Exchange rate
Source: TOI

The rupee’s exchange rate vis-à-vis the dollar is essentially the number of rupees one needs to buy $1. 

This is an important metric to buy not just US goods but also other goods and services (say crude oil) trade which happens in US dollars.

What happens when the rupee depreciates? 

Broadly speaking, when the rupee depreciates, importing goods and services becomes costlier. 

But if one is trying to export goods and services to other countries, especially to the United States, India’s products become more competitive because depreciation makes these products cheaper for foreign buyers.

What will be the impact of the weakening of the rupee on different sectors in India?

Effect of weaker rupee
Source: TOI

Costlier Imports and Inflation: The most crucial impact would be on inflation as the country imports nearly 80% of its crude oil needs. This would mean that imports would become costlier and travel through the value chain to raise input costs.

Current account deficit: Since a large proportion of India’s imports are dollar-denominated, these imports will get costlier. Costlier imports, in turn, will widen the trade deficit as well as the current account deficit, which, in turn, will put pressure on the exchange rate.

Read more: The curious case of India’s rising forex reserves and falling rupee
Is there anything to worry about?

As things stand, India is still not facing an external crisis. Take for instance the issue of external debt. Long-term data shows that India is in a relatively comfortable position.

However, this does not mean there is nothing to worry about. For instance, forex reserves have fallen by over $50 billion between September 2021 and now. In these 10 months, the rupee’s exchange rate with the dollar has fallen 8.7%, from 73.6 to 80. For context, historically the rupee depreciates by about 3% to 3.5% in a year.

Must Read: The rupee’s ‘new lows’: Why it’s not necessarily a cause for concern

 

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