As we can see that the value of rupee is continuously depreciating against US dollar. During the Independence i.e on 1947, the value of $1 was equal to ₹1. But today after 71 years of independence, the value of a dollar is 74 and increasing.
It is very important for all Indians to know the main reason behind this depreciation. Everyone is impacting from this depreciation in the form of an inflation.
Very few people know the actual reason behind this. I will share with you the actual reason and also guide you what you can do to improve it.
How a country rate is determined?
Every country performs business transactions with different countries, i.e in the form of Imports and Exports. Similarly, India too has business transactions with other countries, especially with the US.
Every country sets up a profit margin before completing any business transaction. When a country exports more goods and services to other countries, its currency value increases in the global market.
When it comes to India, we’re importing more rather than exporting. This directly effects to the economy. You can see in the chart below.
This is one factor which is declining the value of Indian rupee.
Why the demand for Dollar is more?
Oil and Gold are the two main commodities which have the highest demands in the International market. While America and Saudi Arabia are the two main countries who produce the maximum oils.
America signed a contract with Saudi Arabia which stated that
“All the business transactions performed by Saudi Arabia will be done in American Dollar”.
In exchange for this America will provide protection to Suadi Arabia’s oil reserves.
This is why 80% of global oil transaction are done in US Dollars. Also, the main reason behind the increase in demand of dollar in the Global Market.
Why Dollar is the strongest currency in the global market?
Every countries currency rate is determined by its Supply and Demand into the Global market. Today, almost in all business transactions, whether directly or indirectly, the US dollar is involved. This makes dollar very powerful in the international market.
The next factor which boosts up US Dollar is its economy. In simple words, an economy of a country is determined by its import and export of goods and services.
India’s economy is fluctuating between the 6th and 7th position in the global market whose approximate value is $2.85 trillion. On the other hand, US has the highest economy with $20.4 trillion.
Because of this reason, US dollar is also called as International currency.
Why Indian Rupee is falling against US Dollar?
There are various factors which lead to the depreciation of rupee over dollar. But the main two factors are
-India’s high population
-Increase in Imports
With the increase in population, more resources have to be imported. As I mentioned above, India’s import ratio is far more than its export. Importing more resources rather than exporting declines the value globally.
In simple words, more population leads to more importing which reduces the country’s economy and finally Indian rupee depreciates against the dollar.
India imports 81% of crude oil from Saudi Arabia. While the price of crude oil is continuously increasing from the past few months. Currently, the price rose up to $80 per barrel.
The reason behind the fall of rupee is also due to the increase in the price of crude oil. As I mentioned earlier crude oil transaction are done in Dollars. So with the increase in the price of crude oil, India has to buy more dollars i.e convert Indian currency into dollar.
This increases the demand for dollar. When the demand for dollar increases than its supply, its value increases. This is directly affecting India’s Current Account Deficit.
For the ones who don’t know the meaning of the Current Account Deficit, let me tell you
Current account deficit(CAD) is a measurement of a country’s trade where the value of the resources it imports exceeds the value of resources it exports.
While when the value of resources it exports exceeds the value of resources it imports, then it is called as Current Account Surplus(CAS).
CAD is not good for a country’s economy.
What makes a country rich?
A country becomes rich when it exports more goods and services. In simple words, when it sells more rather than buying.
While in the case of India its quite opposite i.e. inflow is more than outflow. If this continues this way, India will be in big trouble in the future.
China is cutting down the amount of protein required in foods for pigs. This is to reduce the import of soybean from the US.
Even though China has $3 trillion in reserve. Still, they are focussing on these small things to reduce the imports costs. They focus more on managing their resources.
When rupee gets weaker, RBI(Reserve Bank of India) sells its reserved dollars in order to increase the supply of dollars with the demands. This controls the value of rupee from falling.
What can be the solution?
After knowing the problem, the clear solution that verdicts are India has to reduce its population so that the importing of Goods and Services reduces.
Also, it is not an easy task to reduce the population of India. Maybe, it is next to impossible.
So, India has to change its Global Market status. Just like America, India too has to become an exporting country rather than importing.
For this to happen, India has to produce more high-quality products and export to other countries. When India will export more, its global economy will automatically increase.
When the Indian economy will grow stronger, rupee too will become powerful against the dollar.
Just think if India has the capability to bring its economy under the top 10 economies, it also has the potential to become the strongest economy in the world.
Before Independence, the value of the rupee was greater than a dollar. Later, because of the Current Account Deficit in India and an increase in the economy of America, dollar grew much stronger.
As an Indian, you should think how can you reduce importing and increase exports.
How can we produce quality products in our country, so that people find better quality products in India than the importing ones.
For a bright future, we all have to work on this and try to do something of our country. So, that our country stands out stronger in the global market.
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