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.
- 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.