Devaluing India’s currency
Countries like China devalue their currency to boost their exports in the international market. By using this strategy, goods are bought at a cheaper rate compared to the older rate. Another reason for this is to increase inflow of foreign investment into the domestic market. However, devaluing a country’s currency decreases the purchasing power of that currency and cost of imports increase and lead to a drop in the consumer confidence. The value of the Yuan, China’s currency is fixed by the People’s Bank of china. In 2015 China depreciated its currency by 2% against the U.S Dollar (changes in the different currencies are measured against a dollar).
An indirect impact of this was the Rupee depreciating against the Dollar. India adopted a Floating Rate System in 1975 in which the value of the Rupee is determined by market forces (supply & demand). If the circulation of Rupee increases in international market, the demand for the currency increases and appreciates against the Dollar.
However, if we follow suit on China’s strategy and devalue the Ruppee, the cost of imports will increase and the currency would lose its purchasing power. India imports 80-85% of crude oil, and if the Rupee is devalued, the cost of purchasing crude oil increases, leading to a hike in the price of petrol and diesel in the domestic market, in turn leading to an increase in excise duty on these products raising inflation.
“Today’s rupee value is pretty reasonable. Devaluation will not necessarily help exports. India needs macro-stability, years of sustained growth,” former RBI Raghuram Rajan has said. India being an import driven market, is highly dependent on defense and machinery equipment and fluctuation of the Indian Rupee is a key concern. In order to control fluctuation, the Indian government attempts to control foreign exchange reserve.
With increasing metal and crude oil prices in the international market, slow growth rate, raising current account deficit and imports in India, immense pressure is placed on the Rupee. Hence, the devaluing the rupee would not be good for the Indian economy would place the currency in a flux.
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