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What Rs.80 to a dollar means for India?

  • Published
    20th Jul, 2022
Context

The Indian rupee breached the exchange rate level of 80 to a US dollar with growing concerns about a weaker rupee affecting the broader economy.

Background
  • Since a country interacts with many other countries, it wants to see the movement of the domestic currency relative to all other currencies in a single number rather than by looking at bilateral rates.
  • For its measurement the country wants a tool called exchange rate to keep a record on its exports and imports.
  • Rising Covid-19 cases and pandemic has started this scenario and pushed by Russia-Ukraine war with Global oil price rises.
  • These factors have contributed for rupee depreciation, which means that value of rupee is less against a single dollar.

What is the rupee exchange rate?

  • The price of one currency in terms of the other is known as the exchange rate.
  • A currency’s exchange rate vis-a-vis another currency reflects the relative demand among the holders of the two currencies.
  • For e.g. If the US dollar is stronger than the rupee (implying value of dollar is higher with respect to rupee), then it shows that the demand for dollars (by those holding rupee) is more than the demand for rupees (by those holding dollars).
  • This demand in turn depends on the relative demand for the goods and services of the two countries.

Types of Exchange rates

  • Fixed exchange rate System or Pegged exchange rate system:

The pegged exchange rate or the fixed exchange rate system is referred to as the system where the weaker currency of the two currencies in question is pegged or tied to the stronger currency.

  • Flexible Exchange Rate System:

Flexible exchange rate system is also known as the floating exchange rate system as it is dependent on the market forces of supply and demand.


Why are the rupee-dollar exchange rate and Forex reserves falling?

  • Due to Balance of payment: The BoP is essentially a ledger of all monetary transactions between Indians and foreigners. A weaker rupee will consequently impact on the high pay for each dollar for foreign trade.
  • Twin deficit: The current and capital account deficits are among the major reasons for the imbalances in the economic situation in India.

Impacts on the Economy

  • Costlier Imports in terms of a single dollar
  • Trade deficit due to costlier imports and less money in hands of people of the country.
  • Higher exchange rates
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