What are the causes of rupee depreciation?

By Ritesh|Updated : September 1st, 2022

The main causes of rupee depreciation, or inflation, are the balance of payments, the current account deficit, currency wars, capital inflows from foreign portfolio investors, foreign direct investment, the price of crude oil, and other factors.

Other factors can include strengthening the US dollar and the Government Securities Acquisition Programme (G-SAP) scheme of the Indian government.

Major Causes of Rupee Depreciation

The demand for any money, including Indian currency, determines its value. Any currency's value rises if it needs to do (appreciation). Additionally, a currency's value decreases if its demand diminishes (depreciation).

  • As more international investors invest in India, the demand for Indian currency rises. Foreign investors and businesses must first convert their money into rupees to invest in Indian markets, where only rupees are accepted.
  • As a result, the Indian rupee is in more demand and appreciates against the US dollar and other major currencies.
  • However, when Indian people or businesses import things (such as crude oil, gold, etc.), they must pay in US dollars (the de facto global currency).
  • Because the US dollar is the currency used to settle international deals, Indians sell rupees to buy dollars.
  • The rupee depreciates from the dollar due to increased demand for the dollar.
  • India imports more crude oil than it exports.
  • Indian businesses must spend more money because oil prices have increased globally by more than 60% since 2022.
  • There will be more demand for dollars, which will cause the rupee to weaken.

Summary:

What are the causes of rupee depreciation?

Inflation, the current account deficit, the balance of payments, capital inflows from foreign portfolio investors, currency wars, the price of crude oil, foreign direct investment, and other factors are the causes of the rupee's devaluation.

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