The Indian rupee (INR) has a history of comparison with the US dollar (USD). Its performance has always been measured against the USD. During the time of Independence, the INR and the USD were almost at the same level. But the scenario has changed dramatically over the decades. Right now, the comparison stands at 71.09 INR to the USD. While the USD is one of the strongest currencies in the world, the rupee is among the worst performing currencies in Asia. 

The fall of the INR affects Indian economy through trade deficit. The country does more imports than exports. Hence, the cost of import rises.

For all this gloom due to the weakening rupee, the non-resident Indians (NRIs) are happy. True that the domestic market has sustained a bad impact. But it has been a blessing in disguise for Indians staying abroad who send money to India. 

What is the reason behind the falling Indian rupee?

As the rupee has been depreciating for quite some time now, we need to look at the causes.

• Impact of financial crisis globally

Financial instability in one country impacts other developing countries. Say, there is financial turmoil in a country in the middle east and its currency loses its value against the USD. It will impact the INR, too. For example, the drone attack on the Aramco facility in Saudi Arabia caused a surge in global oil prices. It also caused a fall in the value of the rupee. 

• Huge oil imports

India is one of the top three countries that import crude oil. This is to fulfil more than 80% of the country’s crude oil needs. As a result, India is vulnerable to shifts in international crude oil price. As soon as prices go up globally, our import costs also increase. This hits our current account balance and, in turn, our currency. 

• Trade deficit and resultant current account deficit

Current account deficit (CAD) is a result of trade deficit. Trade deficit is the difference between the imports and exports of goods and services of a country. India is a major importer. Hence, CAD tends to grow as soon as global prices rise. As the rupee depreciates, the gap increases. 

• Interest rate hike by the US Federal Reserve

The USD is the world’s primary reserve currency, meaning any increase in interest rates in the USA will cause the USD to strengthen. This will cause most currencies to depreciate. Recently, the US Federal Reserve has hiked the interest rates many times. As a result, the dollar has appreciated and the rupee has depreciated. There are many NRIs who send money to India from USA.

• The US–China trade war

The tariff war between the USA and China has made the world look on anxiously. As the US government has hiked the rate of interest on all Chinese imports, the fallout has affected all. The INR has also been affected as a result.

The rise of remittances inward 

With the weakening of the rupee, the frequency with which NRIs send money to India has gone up. This is because the value of foreign currency converted to INR increases. Expatriates want to cash in on the drastic fall of the rupee. As a result, inward remittances increase. In 2019, India retained its position on the top of the list of remittances. An astounding USD 79 billion was sent back to India by NRIs.

Another reason for remittances back to India is natural calamities. The floods in Kerala caused a huge spike in remittances, by around 14%. The anxiety of the Indian diaspora abroad to contribute to the relief work resulted in record remittances.

Finally, reaping the benefits of the falling rupee

NRIs can invest in multiple instruments back home. They can invest in non-resident external (NRE) or foreign currency non-resident (FCNR) fixed deposits. The interest rates are about the same as the domestic FD rates. They can also go for higher-risk but higher-return avenues like mutual funds or stocks. Real estate is another investment instrument when the value of the INR is in decline.

Donny white