Navigating the Rupee depreciation

The rupee has been falling and recently, the rupee fell sharply by 105 paise. It is considered as one of the biggest single-session falls in 20 months. Currently, the rupee stands at 74.47 against the US dollar.

Reasons for Rupee Depreciation

A combination of factors are responsible for rupee depreciation, such as

Concerns over Covid-19 has created uncertainty in the market. This affected the FDI(Foreign Direct Investment) and FII(Foreign Institutional Investment). So the rupee weakens further.
RBI’s Government Securities Acquisition Programme (G-SAP) that seeks to buy bonds worth Rs 1 lakh crore might be one of the reasons. It is a quantitative easing policy followed by RBI. The policy supported the government’s increased borrowing Programme through the infusion of liquidity.
The strengthening of the dollar against the euro also contributed to rupee depreciation.
RBI’s status-quo on policy rates is not helping to increase demand in the local economy. This will further impact the rupee.
The value of the rupee will also be impacted by the high bond yields in the US and the inflow of dollars into the US.

Impacts of Rupee Depreciation

It has both positive and negative impacts. For instance,

Depreciation has a positive impact for an NRI. As they are sending money back home they will get more rupees per dollar.
Similarly, Depreciation will have negative impacts on fuel costs and education cost in abroad. For example,
1. One, A depreciating rupee increases the cost of crude import. A rise in cost of crude raises fuel prices and inflation. Crude import accounts for almost 20% of India’s imports.
2. Two, higher education in the US might cost an annual fee of US$ 50,000. A 5% depreciation in the rupee (For example, from 72.5 to 76.125) will raise the cost for one year from Rs 36.26 lakh to Rs 38.06 lakh (Net loss Rs 1.8 lakh)

Recovering from the Rupee Depreciation

There are multiple options to cover the currency volatility risk. They are,

Investing in international funds that invest in global markets through fund of funds. While the Indian investors invest in rupees, in the fund of funds the money gets invested in dollars at the current exchange rate. In case of rupee depreciation, this fund will fully protect against the currency depreciation risk.
In this case, if a person planning for a quick investment (4-5 months) in foreign currency, there are two options to eliminate currency risk.
1. Creating a deposit account in the US and transferring the fund abroad.
2. Going for a currency hedge in the exchanges by investing in future contracts that will mature in 4-5 months.
For example,
1. A future contract worth $50,000, maturing in July at the rate of 74.5, will pay Rs 37.25 lakh.
2. If in December, the rupee depreciates to $77, Then the contract will yield a profit of Rs 1.25 lakh.

Source: IE

Join Our Telegram

Oceanic Anoxic Event 1a and MASS EXTINCTION

Oceanic Anoxic Event 1a and MASS EXTINCTION

25 Dec, 24
SHARE

Oceanic Anoxic Event 1a from the Paris Basin (Environment) Paper-3 PMP OAE 1a refers to a period during the Cretaceous Period (145 million years ago and ended 66 million years ago) when Earth's oceans became depleted of oxygen, causing a significant disruption in marine life. Cause: The event is believed to have been

Viksit Panchayat Karmayogi (Good governance)

26 Dec, 24
SHARE

Viksit Panchayat Karmayogi (Good governance) Governance GS PAPER-2 PMP Dr. Jitendra Singh launched the ‘Viksit Panchayat Karmayogi’ initiative on Good Governance Day, celebrated to mark the 100th birth anniversary of former Prime Minister Atal Bihari Vajpayee. The initiative, which is part of the broader ‘Prashasan Gaon

Major programmes to control Air Pollution

23 Dec, 24
SHARE

Major programmes to control Air Pollution National Clean Air Programme? It was launched by the Ministry of Environment, Forests and Climate Change (MoEFCC) in January 2019. It is the first-ever effort in the country to frame a national framework for air quality management with a time-bound reduction target. The

Air pollution and Air quality Measures in India

21 Dec, 24
SHARE

Air pollution and Air quality Measures in India (Environment) GS Paper-3 P-M-P Air pollution may be defined as the presence of any solid, liquid or gaseous substance including noise and radioactive radiation in the atmosphere in such concentration that may be directly and/or indirectly injurious to humans or other l

Geopolitical Significance of Ports

20 Dec, 24
SHARE

Geopolitical Significance of Ports (IR) Act as geopolitical assets: Ports enhance the projection of strategic reach, which helps strengthen the country’s control over important sea and energy supply routes. E.g. Indian Navy’s staging base at Agalega Islands will enable marine patrols