Indian Rupee Weakens Amid Rising US Dollar Demand

Why in the news?

The Indian rupee breached the Rs 85 mark against the US dollar due to trade imbalances, inflation disparity, and investors pulling out funds from India.

Indian Rupee Weakens Amid Rising US Dollar Demand

Why is the Rupee Weakening?

Trade Imbalance:

  • If India imports more from the US than it exports, demand for the US dollar increases, causing the rupee to weaken.

Service Trade:

  • Higher spending on US services (e.g., tourism) than Americans spending on Indian services also raises demand for dollars, weakening the rupee.

Investment Dynamics:

  • When American investments in India exceed Indian investments in the US, the rupee strengthens; the opposite weakens it.

What is the Exchange Rate?

  • The exchange rate indicates how much of one currency is needed to buy another, e.g., Rs 85 for $1.
  • Within India, rupees are used for domestic transactions, but foreign transactions require converting rupees into the respective foreign currency.
  • The currency market operates like any other market, with fluctuating exchange rates driven by supply and demand.

Key Factors Affecting Exchange Rate:

  • Trade Policies:
  • US restrictions or tariffs on Indian goods reduce demand for Indian rupees, leading to depreciation.
  • Inflation Disparity:
  • Higher inflation in India compared to the US erodes the rupee’s value and reduces its appeal to investors.
  • Capital Flows:
  • Investors withdrawing funds from India to invest in more stable or lucrative markets, like the US, decrease rupee demand.

Sources Referred:

PIB, The Hindu, Indian Express, Hindustan Times