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Depreciation of Rupee

  • 30 Oct 2020
  • 2 min read

Why in News

Recently, the Indian rupee depreciated below the 74 levels against the US dollar.

Key Points

  • The rupee depreciated by 16 paise to settle against the previous low of August 73.87 against the US dollar.
  • The rupee depreciation is on account of global risk aversion. The investors are preferring a stable US dollar over rupee.
    • Under risk aversion, an investor prefers lower returns with known risks rather than higher returns with unknown risks.
  • The US dollar is advancing not only against the rupee but also against major currencies due to the surging Covid-19 cases.
  • The escalating Covid-19 cases in Europe has stoked fears across markets that fresh lockdowns would further hit the already fragile economic recovery.

Appreciation and Depreciation of Currency

  • In a floating exchange rate system, market forces (based on demand and supply of a currency) determine the value of a currency.
  • Currency Appreciation: It is an increase in the value of one currency in relation to another currency.
    • Currencies appreciate against each other for a variety of reasons, including government policy, interest rates, trade balances and business cycles.
    • Currency appreciation discourages a country's export activity as its products and services become costlier to buy.
  • Currency Depreciation: It is a fall in the value of a currency in a floating exchange rate system.
    • Economic fundamentals, political instability, or risk aversion can cause currency depreciation.
    • Currency depreciation encourages a country's export activity as its products and services become cheaper to buy.

Source: TH

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