Rupee Slips Due to Covid-19

• 16 Apr 2020

Why in News

The rupee slipped 17 paise against the dollar on 15^th April, 2020, amid heightened uncertainty over the economy as the Covid-19 pandemic continues to spread.

Key Points

• The rupee closed at a record low of 76.44 against the dollar on 15^th April, 2020. Rupee was 76.27 against dollar on the previous day.
• However, the dollar index was trading 0.3% higher at 99.19. The U.S. Dollar Index (USDX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies.
• It can be noted that the rupee has weakened about 7% against the dollar in 2020 and has hit a record intraday low of 76.55.
  
  • This implies that the rupee has become less valuable with respect to the dollar, implying depreciation of the rupee.
• According to some experts, the Reserve Bank of India (RBI) has not intervened strongly in the market to stop rupee depreciation.
  
  • They expect the RBI to intervene once the rupee breaches the 77 to a dollar.
• In its macroeconomic review , RBI had said if the rupee depreciates 5% from the baseline (i.e. Rs 75 per dollar), inflation could rise by 20 basis points (bps) while the Gross Domestic Product (GDP) growth could be higher by about 15 bps via increased net exports.

Currency Depreciation

• Currency depreciation is a fall in the value of a currency in a floating exchange rate system.
  
  • In a floating exchange rate system, market forces (based on demand and supply of a currency) determine the value of a currency.
• Rupee depreciation means that rupee has become less valuable with respect to dollar.
  
  • It means that the rupee is now weaker than what it used to be earlier.
  • For example: $1 used to equal to Rs.70, now $1 is equal to Rs. 76, implying that the rupee has depreciated relative to the dollar i.e. it takes more rupees to purchase a dollar.
• Some of the factors that influence the value of a currency:
  
  • Inflation
  • Interest rates
  • Trade deficit
  • Macroeconomic policies
  • Equity market.
• Currency depreciation increases a country’s export activity as its products and services become cheaper to buy.
• The Reserve Bank of India intervenes in the currency market to support the rupee as a weak domestic unit can increase a country’s import bill.
• There are a variety of methods by which RBI intervenes:
  
  • It can intervene directly in the currency market by buying and selling dollars.
    
    • If the RBI wishes to increase the rupee value, then it can sell dollars and when it needs to bring down rupee value, it can buy dollars.
  • The central bank can also influence the value of rupee by the way of monetary policy.
    
    • RBI can adjust the repo rate (the rate at which RBI lends to banks) and the liquidity ratio (the portion of money banks are required to invest in government bonds) to control rupee.

Source: TH