India and other developing countries’ currencies are losing value. Why is this happening?

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Author: Prahlad Sabnani, Retired Deputy General Manager,
State Bank of India

Significantly since the Corona pandemic and the Russia-Ukraine war, the value of the US dollar has been increasing rapidly in the international market compared to other countries currencies. One US dollar today is worth about 80 rupees. This means that the value of the currency of other countries, including India, is falling in the international market. In fact, the demand for the US dollar in the global market has increased a lot in recent times.

  • On the one hand, crude oil prices have risen rapidly and reached around US$ 110 per barrel from around US$ 130 per barrel. Often all countries pay for the purchase of crude oil in the international market in US dollars, due to which the demand for US dollars has also increased and due to which the price of US dollars has also increased. Second, the inflation rate in America and other developed countries has reached 8 percent (9.1 percent in America), which is the highest rate of inflation in the last 40-45 years.
  • To control inflation, interest rates are being increased by these countries, due to which the returns on the bonds issued by these countries are very much attracted, and foreign investors withdraw their investment from the stock market of developing countries in American bonds.
  • Increasing their investment in foreign exchange reserves of those countries, from where the dollar investment is being withdrawn, is depleting, putting pressure on their own currency, and the value of the dollar is increasing continuously.
  • The value of the Indian rupee has also come down by about 6 percent against the US dollar in the calendar year 2022. Due to the continuous increase in interest rates in America and other developed countries, Foreign portfolio investors have withdrawn more than Rs 230,000 crore from India during the last six months.
  • Secondly, India is one of the world’s largest importers of crude oil. India imports more than 80 percent of its oil consumption.
  • Recently, the demand for crude oil has increased very rapidly due to India’s economic activities boom. At the same time, the price of crude oil in the international market had also reached a record US$ 130 per barrel.
  • Therefore, India needs US dollars to pay the price of crude oil, and due to the increase in its demand, the US dollar cost is also increasing continuously in the international market. Not only the Indian Rupee, but the decrease in the value of currencies of almost all the countries of the world is visible.
  • Instead, other countries’ currencies have fallen more rapidly than the Indian rupee. In this view, the value of the Indian Rupee is increasing relative to the currencies of other countries (except the US Dollar).
  • Recently, the euro price has come down to that of the US dollar. The main reason for this is also the investors pulling out of the Eurozone and diverting them to the US.
  • In 2021, the price of one euro was around 90 rupees, which has now come down to about 80 rupees. Thus the rupee has improved in value against the euro.
  • Similarly, the price of one Japanese yen was Rs 0.70 in the year 2021, which has become Rs 0.58 today, and the price of one pound sterling was Rs 101 in the year 2021, which has now come down to Rs 94, and the price of one French franc in the year 2021. It was Rs 13.60, which has now come down to Rs 12.2.

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Thus, the value of the Indian Rupee against the above-mentioned four significant currencies has increased in the international market but only against the US Dollar due to the reasons mentioned above.
The continuous strengthening of the US dollar at the global level and the fall in the value of the currency of other countries is not good for other countries at the international level. Because for example, if we take the example of India, the continuous fall in the price of the Indian rupee relative to the US dollar means that the goods imported by India become expensive, and more US dollars are paid by India. As a result, the rate of inflation is increasing in India, also called imported inflation. In this way, the dependence of the US dollar on foreign trade of other countries, including India, has increased. Although all countries of the world have been using foreign currencies, such as the dollar, euro, renminbi, and pound, to conduct foreign trade globally, China’s currency yuan is also being used. But, the US dollar remains the most effective currency for foreign trade, and so is the US monarchy worldwide.
But now, to reduce the dependence on the US dollar in foreign trade, the Reserve Bank of India has recently accepted Indian Rupee as a medium of payment in foreign trade. Crude oil imports from these countries were facing a lot of trouble, mainly due to economic sanctions imposed on Russia and its former Iran after the war between Russia and Ukraine. Therefore, these countries consented to accept the Indian Rupee as payment for crude oil. So now, not only Russia and Iran but also many other countries like Sri Lanka, Bangladesh, and Arab nations will also be able to pay and receive payment in Indian Rupees on imports and export from India. This will reduce the demand for US dollars for India. The level of import of goods (especially crude oil) worth about 300 million US dollars per month is achieved by India only from Russia, which is likely to be about 3600 million US dollars in the whole year. So is. This amount will be paid by India in rupees, India’s dependence on the US dollar will be reduced to this level, and the pressure on the rupee value will also be less. Which will ultimately also help in controlling inflation in India. This will also benefit the countries making foreign trade with India because the price of goods imported from India by these countries can also be paid in Indian Rupees only. Therefore, the dependence of these countries on the US dollar will also be less, and exports from India to these countries will start happening in more quantity.
Despite the ever-increasing crude oil prices in the international market, the import of crude oil is increasing in India, as well as a considerable increase in the import of coal and gold has also been seen in recent times, due to which India’s trade deficit has also increased to a record level. But is growing due to which immense pressure is being felt on India’s foreign exchange reserves. According to recently released information, the export of goods from India increased by 23.52 percent to US $ 4,013 million in June 2022. While there has been a jump of 57.55 percent in India’s imports, in June 2022, India’s imports have increased to 6,631 million US dollars. Thus, in June 2022, India’s trade deficit reached the highest level of US $ 261.8 million. This directly impacts India’s foreign exchange reserves and has now come down to the US $ 58,020 million on July 8, 2022. In the week ended July 8, 2022, there was a decrease of US $ 8100 million in India’s foreign exchange reserves.
Accepting Indian Rupee as a medium of payment in foreign trade by India will prove to be a game changer for India. It will not only reduce the pressure on India’s foreign exchange reserves in recent times. Instead, the trade deficit will also be kept under control, which will curb imported inflation. Simultaneously, the acceptance of the Indian Rupee as a medium of payment in the international market will begin to grow even more rapidly.

This is an opinion-based article, and the E-Journal Times Magazine is not responsible for any presented data and views.

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