Is Indian Rupee Depreciation a Threat or Opportunity? Growth, Challenges & Global Impact (2024)

India’s Economic Growth and the Internationalization of the Indian Rupee

India, with its growing economy and ambitious goals, is actively working towards increasing the usage of the Indian rupee (INR) in worldwide commerce and investment. The process of internationalizing the INR is gaining momentum, as the government unveils the Foreign Trade Policy to facilitate the use of the home currency in foreign commercial operations. In this article, we will delve into India’s economic growth and its impact on the Indian rupee, exploring the historical context and current challenges, as well as the future prospects of the INR in the global currency market.

The Journey of the Indian Rupee: From Parity to Depreciation

The Indian rupee has undergone significant changes since India gained independence in 1947. At that time, 1 INR was equivalent to 1 USD. However, the dynamics shifted drastically over the years. It is widely believed that the absence of a standardized metric system led to currencies having equal purchasing power. The Bretton Woods Agreement in 1944 further influenced global currency values, and as India embarked on its journey of independence, everyone adapted to the new monetary landscape.

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Nevertheless, the value of the INR has experienced a steady depreciation since 1947. By contemporary metrics, the exchange rate of INR to USD was 0.09 in 1913, 3.31 in 1948, 3.67 in 1949, and 7.50 in 1970. In recent times, the rupee faced challenges in 2022 due to global developments, leading to a decline of over 11%.

Throughout the year, the rupee has witnessed a consistent devaluation against the dollar. Starting from an opening exchange rate of 74.40, the rupee has lost value. On 14th July, the rupee reached a significant low of 80.20 against the dollar. Although it experienced a slight decrease to 78.13, it eventually revisited an all-time low in August.

On October 20th, the rupee hit an unprecedented low of 82.77 to the dollar, primarily influenced by the United States’ tightening monetary policy. The rupee’s decline of 8.5% against the dollar since January aligns with the performance of other currencies paired with the dollar.

Implications of the Rupee’s Depreciation

As the value of the Indian rupee decreases, the cost of imports increases. This can have significant implications for both external and fiscal deficits, impacting the overall economy. A weaker rupee makes imports more expensive, affecting sectors that heavily rely on imported goods. It can also result in inflationary pressures, as the cost of imported raw materials rises.

The Indian Rupee’s Global Currency Market Potential

Given the current market conditions, can the Indian rupee truly challenge the dominance of the dollar in the global currency market? The initial half of 2023 is expected to witness a decline in the value of the rupee against the US dollar (INR to USD) due to persisting concerns about the economy and global inflation, which hinder risk-taking.

However, the second half of the year holds more promising recovery prospects. Factors such as the decline in crude oil prices and other commodities, coupled with foreign investors’ continued interest in Indian stocks, may contribute to the rupee’s potential rebound.

Analysts emphasize that monitoring equity inflows will be crucial for foreign investors considering the rupee. Wallet Investor, a financial analysis platform, predicts further depreciation of the rupee against the dollar in 2025, projecting a USD to INR rate increase to 88.276 by the end of the year.

Government and Reserve Bank of India’s Involvement

To facilitate the worldwide usability of the Indian rupee and enable its use in cross-border trade transactions, the government has introduced the Foreign Trade Policy. This initiative aims to foster global trade negotiations in INR at market-determined exchange rates, reducing dependence on third currencies like the USD.

The Reserve Bank of India (RBI) has also approved INR settlement for international commerce and the ability to borrow money from foreign businesses in INR. Currency exchange agreements with various nations, including Sri Lanka, the UAE, and Japan, allow the use of the INR in cross-border trade and investment activities.

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India’s pursuit of increasing the global usage of the Indian rupee demonstrates the country’s economic ambitions and its desire to reduce reliance on other currencies. Although the rupee has experienced depreciation over the years, future prospects suggest the potential for recovery. Through strategic reforms and cooperative efforts, India aims to establish the INR as a competitive international currency, bolstering the long-term stability and growth of its economy.