Rupee Depreciation: Pros and Cons

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The Indian rupee plunged to all-time low and hits 71 against dollar for the first time. The Indian rupee’s depreciation against the US dollar over the past year has importers worried and exporters rejoicing. The startups also showing mixed reactions. For few startups, the depreciation of the rupee means higher costs, while others are benefited from higher revenue numbers while converting dollars to rupees. Even cost of studying in the U.S. would go up.

The recent depreciation in rupee can be attributed to two main reasons:

  1. The hike in US federal fund rates
  2. The crash in Turkish currency Lira

The depreciation in currency has mixed impacts over individuals and industry.  Like, domestic residents will find imports and foreign travel more expensive. However domestic exports will benefit from their exports becoming cheaper.

Let’s look into pros and cons of currency depreciation.

Advantages of Depreciation:

  1. Exports become cheaper and more competitive to foreign buyers. Therefore, it provides a boost for domestic demand and could lead to job creation in the export sector.
  2. Higher level of exports should lead to an improvement in the current account deficit. This is important if the country has a large current account deficit due to a lack of competitiveness.
  3. A week currency could help foreign investment through secondary or primary market; as a stronger dollar would give the investor more rupees in his hand and thus an opportunity to buy more shares.
  4. The domestic products which gets competition from imported products gets an indirect advantage as import gets costlier which gives local product a cost benefit.
  5. A number of Indian companies now have sizeable international presence apart from direct exports. A stronger foreign currency helps boost their consolidated numbers.

Disadvantages of Depreciation:

  1. India being the third largest oil importing country could have an adverse impact of currency depreciation. Rising imports will increase the current account deficit.
  2. Currency depreciation could lead to inflation as cost of imported goods would go up e.g. rising fuel prices would push prices of commodities higher.
  3. Students looking to study abroad are severely hit as they have to shell out more rupees to meet the cost.
  4. It affects those companies who have raised debt abroad and have not fully-hedged their position.

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