Not just the rupee, almost all countries’ currencies are depreciating. Instead, other countries’ currencies have depreciated faster than the Indian rupee. In this view, the value of the rupee is increasing compared to the currencies of other countries (except the US dollar).
Especially after the corona epidemic and the Russia-Ukraine war, the value of the US dollar in the international market is increasing very quickly compared to the currencies of other countries. One US dollar is worth around 80 rupees today. It means that the value of currency of other countries including India is decreasing in the international market. In fact, the demand for the US dollar in the international market has increased a lot in recent times. On the one hand, crude oil prices have increased at a very fast pace and have now reached around US $ 110 per barrel from around US $ 130. Often all countries pay in US dollars for the purchase of crude oil in the international market, due to which the demand for US dollars has also increased and due to this the price of US dollars has also increased. Second, the rate of inflation in the US and other developed countries has crossed 8 percent (9.1 percent in the US), which is the highest rate of inflation in these countries in the last 40-45 years. Interest rates are being raised by these countries with the aim of controlling inflation, which is causing attractive returns on bonds issued by these countries, and foreign investors are withdrawing investments in the US from the stock markets of developing countries. Investment in bonds. Countries from which dollar investments are being withdrawn are depleting foreign exchange reserves, putting pressure on their own currencies and continuing to appreciate the value of the dollar.
The Indian rupee has also depreciated by around 6 percent against the US dollar so far in calendar year 2022. Due to the continuous increase in interest rates in the US and other developed countries, foreign portfolio investors have withdrawn Rs. More than 230,000 crores have been withdrawn. Secondly, India is one of the largest importers of crude oil in the world. India imports more than 80 percent of its oil. In recent times the demand for crude oil has increased rapidly due to the boom in economic activities in India. At the same time, the price of crude oil in the international market also reached a record 130 US dollars per barrel. Hence, India needs US dollar to pay the price of crude oil and due to its increasing demand, the price of US dollar is continuously increasing in the international market as well.
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Not only the Indian rupee but almost all the currencies of the world are depreciating. Instead, other countries’ currencies have depreciated faster than the Indian rupee. In this view, the value of the Indian rupee is increasing compared to other countries’ currencies (except the US dollar). In recent times the value of the Euro has fallen against the value of the US Dollar. The main reason for this is investors leaving the Eurozone and turning to America. In the year 2021, the price of one euro was around 90 rupees, which has now reduced to around 80 rupees. Thus the value of the rupee has improved against the euro. Similarly, one Japanese Yen was worth Rs 0.70 in the year 2021 which has become Rs 0.58 today and one Pound Sterling was worth Rs 101 in the year 2021 which has now reduced to Rs 94 and one French Franc is worth Rs. In the year 2021 it was Rs 13.60 which has now reduced to Rs 12.2. Thus, the Indian rupee has appreciated in the international market against the above four major currencies but only against the US dollar due to the above reasons.
The continued strengthening of the US dollar globally and the devaluation of other countries’ currencies do not bode well for other countries internationally. Because, for example, if we take the example of India, a continuous depreciation of the Indian rupee against the US dollar means that the goods imported by India become more expensive and India pays more US dollars. As a result of this the rate of inflation is also increasing in India and it is also called imported inflation. Thus, the dependence of the US dollar on the foreign trade of other countries of the world, including India, has increased. However, all the countries of the world have been using foreign currencies like dollar, euro, renminbi and pound to conduct foreign trade globally and now the Chinese currency yuan is also being used. But, the US dollar is still the most effective currency for foreign trade and so is the US monarchy around the world.
But now to reduce dependence on US dollar in foreign trade, Reserve Bank of India has recently accepted Indian rupee as a medium of payment in foreign trade. Imports of crude oil from these countries were facing a lot of difficulty especially due to the economic sanctions imposed on Russia and its former partner Iran after the war between Russia and Ukraine. Therefore, these countries gave their consent to accept the Indian rupee as payment for crude oil. So now not only Russia and Iran but also many other countries like Sri Lanka, Bangladesh and Arab countries will be able to pay and receive Indian rupees on imports and exports from India. This will reduce the demand for US dollars for India. India is achieving a level of imports of goods (mainly crude oil) of around US$ 300 million per month from Russia alone, which is likely to be around US$ 3600 million in a full year. This amount will be paid by India in rupees and India’s dependence on the US dollar will be reduced at this level and the pressure on the value of the rupee will also be reduced. Which will ultimately also help in controlling inflation in India. This will also benefit countries doing foreign trade with India as the price of goods imported by these countries from India can also be paid in Indian rupees. Therefore, the dependence of these countries on the US dollar will also decrease and India will start exporting more to these countries.
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India’s crude oil imports are on the rise even as the prices of crude oil continue to rise in the international market, along with coal and gold imports, there has been a huge increase in recent times, due to which India’s trade deficit is widening. But it has increased to a record level. But it is increasing due to which there is a huge pressure on India’s foreign exchange reserves. According to recently released data, merchandise exports from India increased by 23.52 percent to 4,013 million US dollars in the month of June 2022. While India’s imports have jumped by 57.55 percent and India’s imports have increased to 6,631 million US dollars in June 2022. Thus, India’s trade deficit has reached an all-time high of US$ 261.8 million in the month of June 2022. This has had a direct impact on India’s foreign exchange reserves, which have now declined to US $58,020 million as on 8 July 2022. India’s foreign exchange reserves declined by US$8100 million in the week ended July 8, 2022.
India’s acceptance of Indian rupee as a medium of payment in foreign trade will prove to be a game changer for India and will not only reduce the pressure on India’s foreign exchange reserves in recent times, but also keep the trade deficit down. Control and this will also curb imported inflation. Simultaneously, the acceptance of Indian rupee as a means of payment will grow faster in the international market.
– Prahlad Sabnani
Retired Deputy General Manager
State Bank of India