Indian Rupee depreciation against the dollar: Why it's not a cause for concern

The daily fluctuations in the exchange rate of the Indian rupee against the dollar have kept the media busy, with many analyses trying to determine the reasons behind its depreciation.

- Kishore Kumar Biswas

It is true that the rupee has been losing value month after month throughout 2024, but the overall decline has been only 2.68%. In the last three months alone, it has fallen by 2.2%.

Understanding Exchange Rates and Currency Value

The exchange rate between two currencies, such as the Indian rupee and the US dollar, refers to how much of one currency is needed to obtain a unit of the other currency. For instance, if the exchange rate of the rupee against the dollar is 50, it means that 50 rupees are required to purchase one US dollar. If the exchange rate increases, meaning one needs to pay more rupees for the same dollar, the exchange value of the rupee has depreciated against the dollar. However, this does not necessarily affect the rupee's value against other global currencies.

Why is the Indian Rupee Falling against the Dollar?

There are five primary factors contributing to the rupee's depreciation:

Improved US Economy: The US economy has shown signs of recovery, which has led to a strengthening of the US dollar.

Rising US Bond Yields: US bond returns have increased due to lowerthan-expected interest rate cuts by the Federal Reserve, prompting investors to purchase US bonds, thereby raising demand for USD.