Hindu Editorial Analysis : 23-December-2024

Recently, the Indian rupee crossed the 85-mark against the US dollar, marking a continuing trend of depreciation. Ten years ago, the exchange rate was ₹61 per dollar, and earlier this year it was ₹83. The depreciation of the rupee is caused by a combination of various economic factors.

What is the Exchange Rate?

The exchange rate is the value of one currency in terms of another. For instance, if the exchange rate is ₹85 per $1, it means you need 85 Indian rupees to buy one US dollar. Exchange rates are crucial for international trade and investment because they determine how much of one currency is needed to purchase goods or services from another country.

Reasons Behind the Weakened Rupee

Several factors have contributed to the weakening of the rupee:

  • Trade Deficit: India’s trade deficit increased to $26.83 billion in October 2024, meaning India needs more dollars to pay for imports. This demand for dollars puts pressure on the rupee.
  • Capital Outflows: Foreign investors have withdrawn ₹43,856 crore from Indian markets in 2024, which further weakens the rupee.
  • Stronger US Dollar: The US dollar index has increased by around 15% this year, making the rupee and other currencies weaker in comparison.
  • High Inflation: India’s inflation has been higher than expected, reaching 6.77% in October 2024. This increases the cost of Indian exports and reduces their competitiveness.
  • Trade in Services: If Indians spend more on services from the US (like tourism), it increases the demand for dollars, further weakening the rupee.
Impacts of a Weaker Rupee

A weaker rupee has several effects on the economy:

  • Costlier Imports: As the rupee weakens, the cost of importing goods, especially crude oil, rises. This increases inflation and puts a strain on household budgets.
  • Debt Burden: India’s external debt stood at $620.7 billion at the end of June 2024. A weaker rupee increases the cost of servicing this debt, adding pressure on government finances.
  • Higher Travel Costs: Traveling abroad, especially to the US, becomes more expensive. A trip that cost ₹5 lakh last year now costs about ₹5.75 lakh.
  • Benefits for Exporters: On the positive side, a weaker rupee makes Indian exports cheaper and more competitive in the international market, benefiting export-oriented industries.
Measures to Strengthen the Rupee

The Indian government and the Reserve Bank of India (RBI) are taking several steps to strengthen the rupee:

  • Boosting Exports: Initiatives like the Production Linked Incentive (PLI) scheme are aimed at promoting exports. India’s merchandise exports grew by 10.3% year-on-year in November 2024, showing positive momentum.
  • Attracting Foreign Investment: The government is working to improve the ease of doing business to attract Foreign Direct Investment (FDI). India received $46.1 billion in FDI between April and September 2024.
  • Controlling Inflation: The RBI has been increasing interest rates to combat inflation, although inflation remains a challenge.
  • Diversification of Trade: India is also exploring trading in rupees with other countries to reduce dependence on the US dollar.
Why In News

The Indian rupee recently crossed the 85-mark against the US dollar, continuing a long-term trend of weakening relative to the dollar. A decade ago, this rate was ₹61, and it was ₹83 earlier this year, highlighting a significant depreciation over the past few years. This steady decline has raised concerns about the impact on India’s economy, particularly in terms of inflation, imports, and the overall balance of payments.

MCQs about The Weakening of the Indian Rupee Against the US Dollar
  1. What is the exchange rate?
    A. The cost of importing goods from another country
    B. The value of one currency relative to another
    C. The interest rate set by the central bank
    D. The amount of foreign currency held by a country
    Correct Answer: B. The value of one currency relative to another
    Explanation: The exchange rate determines how much of one currency is required to buy another currency, which is crucial for international trade and investments.
  2. Which of the following is a primary reason for the weakening of the Indian rupee?
    A. A decrease in foreign portfolio investments in India
    B. A trade surplus with the US
    C. A reduction in India’s external debt
    D. An increase in India’s retail inflation
    Correct Answer: D. An increase in India’s retail inflation
    Explanation: Higher inflation in India, compared to many of its trading partners, makes Indian exports less competitive and affects the value of the rupee, contributing to its depreciation.
  3. How does a weaker rupee impact Indian imports?
    A. It makes imports cheaper for Indian consumers
    B. It increases the cost of importing goods, such as crude oil
    C. It reduces demand for foreign goods in India
    D. It encourages more imports of non-essential goods
    Correct Answer: B. It increases the cost of importing goods, such as crude oil
    Explanation: When the rupee weakens, it takes more rupees to buy foreign goods, particularly essential imports like crude oil, which drives up costs and increases inflation.
  4. What initiative has the Indian government taken to boost exports and support the rupee?
    A. Implementing higher interest rates
    B. Launching the Production Linked Incentive (PLI) scheme
    C. Reducing foreign investment in the country
    D. Pegging the rupee to the US dollar
    Correct Answer: B. Launching the Production Linked Incentive (PLI) scheme
    Explanation: The PLI scheme is designed to encourage domestic manufacturing and boost exports, which can help improve the trade balance and, in turn, support the value of the rupee.

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