While investing companies convert their currency to rupee for Indian markets, demand for the rupee increases thus strengthening the Indian rupee. Vice versa when these companies again buy dollars then the dollar becomes scarce and gains value while the value of the Indian rupee decreases
Long Story Short
The current exchange rate of dollar to Indian rupee as of June 9, 2022, is 77.8125, the lowest value the Indian currency has ever seen.
This rupee depreciation has been an ongoing process since the past few weeks, evoking mixed and sharp reactions from the opposition leaders.
Tweeting about this a month back former Congress president Rahul Gandhi wrote, "Modi Ji you used to criticise Manmohanji when the Rs fell. Now Rs is at its lowest ever value. But I won't criticise you blindly. A falling Rs is good for exports provided we support exporters with capital and help create jobs. Focus on managing our economy, not media headlines."
Modi ji, you used to criticise Manmohan ji when ? fell.
Now ? is at its lowest ever value. But I won't criticise you blindly.
A falling ? is good for exports provided we support exporters with capital and help create jobs.
Focus on managing our economy, not media headlines.
— Rahul Gandhi (@RahulGandhi) May 9, 2022
So what exactly does losing the value of currency mean?
In layman's terms, devaluation of a currency is an activity undertaken by the monetary body of a country to officially lower the value of a country's currency within a fixed or pegged interest rate.
This loss in value can be of two types, depreciation as in the case of Indian rupee where currency loses value due to non-favourable foreign exchange and deliberate devaluation as in the case of China in 2015.
The reasons for the depreciation of the Indian rupee are a combination of factors set against the backdrop of the Russia-Ukraine invasion. The prime factor is the withdrawal of a significant part of foreign investment from the country due to the new US federal policy.
While investing companies convert their currency to rupee for Indian markets, demand for the rupee increases thus strengthening the Indian rupee. Vice versa when these companies again buy dollars then the dollar becomes scarce and gains value while the value of the Indian rupee decreases.
The next factor is the difference in the cost of imports and exports. India is a net import country and recently its import has only increased due to the war triggered oil crisis. So Indian currency is converted into US dollars further decreasing its value.
The first major devaluation of the rupee in India was voluntary and under the pressure of the US and the World Bank. Indira Gandhi devalued the rupee by 36.5% in June 1966 thus increasing the dollar's value against it by 57.4%.
Drawbacks And The Case Of The Dragon
The main disadvantage of a weak currency is the soaring inflation rate so the person spends more to continue with the same lifestyle. It is especially detrimental to fix income groups and it is common for India not to revise tax slabs according to inflation just as it did in this year's Union budget.
RBI also raises interest rates if inflation is high. The import of foreign products becomes costly, so everything of foreign origin becomes more expensive even though the company has not changed the basic price.
Travelling abroad would be more costly and the life of students who are staying abroad funded by Indian parents would be slightly tough. if inflation is that bad, why does voluntary devaluation of currency exist?
In a surprising move that led to the fall of stock markets across Europe and the US, the People's Bank of China (the Chinese equivalent of RBI) devalued its currency by approximately 4% in 3 consecutive devaluations.
This was done because China had developed as a massive manufacturing hub and participated in a fifth of the world's production. The value of the Yuan had appreciated by 33% between 2005 and 2015 but the GDP was declining.
Also, there were new players like Indonesia, Bangladesh and Vietnam in the market for providing cheap labour which was China's USP in the world.
Devaluation of the currency was a solution to both these issues and aided the economic development of China. Since foreign products became expensive, the domestic industry was pushed forward.
It was during this time that people started preferring local brands and companies like Xiaomi came up gaining success worldwide, thus the GDP was back to normal.
Secondly, the cost of exports decreased so the investors who had moved to other countries saw a better opportunity in China and returned, thus China got back its business by killing competition.
Though it did not work well in the US where Trump blamed China for 'currency manipulation' and imposed a tariff on Chinese products.
Let's See The Positive Side
India can also reap these benefits since the cost of exports will be low, and more Indian companies will be able to conquer world markets if they improve their quality. Competition would be low and so the creation of MNCs will be easier.
Domestic industries will be at an advantage as the difference in price between their articles and imports would be wider, so most people will choose the former given that they have the same quality. This happened earlier in the case of Solar cells, China was the majority player in silicon-based solar cells but Obama invested in Solyndra's gallium selenium cells betting that Silicon would soon run out.
Obviously, he lost and China began exporting large batches of silicon cells and Solyndra applied for bankruptcy soon. On the contrary, India imposed a tariff on Chinese cells after developing its solar cells and they are a commercial success.
This was a dynamic move for India and a victory for Indian companies. There is a need to be cautious as well or India may end up like Nigeria whose Naira has lost 99.7% of its value in the last four decades. They devalued their currency in hope of foreign investment but lacked infrastructure and steady economic policies to attract customers and hence are suffering.
So it is important to note that it will be a benefit only when local industries are capable of embracing larger orders both domestic and international. We must understand that a stronger currency does not make a stronger economy but a strong economy makes a strong currency.