Why Indian Rupee is falling against dollar in 2018

Why Indian Rupee Is Falling Against Dollar In 2018

At the time of India's independence, In 1947 the price of US $ 1 was equal to 1 rupee. But due to the strong growth and development of US economy and other positive currency strengthning factors, dollar became stronger and stronger while Indian rupee weakened with respect to time.

Now It's 2018, and the value of dollar has risen at a tremendous rate. In the beginning of the year 2018 the dollar was valued at 63 rupees and in the present scenario in October 2018 it has increased substantially to 73 rupees thereby touching an all time high at record levels, causing a worrying concern among the Indian investors and the Indian economy.

This tremendous and the continuous increase in the value of the dollar and the continuous falling of Indian rupee with the respect to the dollar is a matter of concern to the economy, the industry and the households too.

Furthermore, severely affecting the Indian stock markets, as the indices (Sensex and Nifty)are breaking down daily on a record level.

Dollar is a globally accepted and the most traded currency of the world. So, it's no surprise that any fluctuations in dollar will ultimately have great impact on many.

So, what are the reasons behind the continuous falling of the Indian rupee against the US dollar.

Let me give you a glimpse about it.

Finomenal Wealth 

• Rising crude oil prices

The prices of crude oil is continuously increasing in the international market and the price have reached to the levels of $ 80 per barrel.

This is one of the major reasons of the Indian rupee falling against US dollars.

Let's take a deep dive into how crude oil prices is one of the main reasons.

India is an oil importing country and it imports close to 80 percent of its crude oil requirements.

So, In order to fulfill it's requirements, India buys crude oil and simultaneously as the prices of crude oil increases, the bill or the amount India has to pay to buy the crude oil also increases.

As, the crude oil is bought in terms of dollar so, India has to convert Indian currency into dollars to make the payment of the import. Thereby, the demand for the dollar increases against it's supply.

And as per demand and supply of economics:- the price increases with respect to increase in the demand.

So, when the demand of dollar increases, the value of the dollar also increases i.e it appreciates and dollar becomes stronger with respect to Indian currency and vice versa : value of rupee depreciates against the dollar.

The current market is facing the same scenario and this rise in the crude oil prices is affecting the current account deficit too.

• Current account deficit

The current account deficit is when the value of the goods and services it imports exceeds the value of the goods and services it exports.

Current account deficit is a negative aspect and not at all good for any economy.

India is standing on the same footing of current account deficit where it's total import is more than its export.

So, As India imports crude oil as well as many other goods and services.

The imports of India exceeds it's exports and all the import payments are made in terms of dollar. So India again has to pay in terms of US dollar and thereby the outflow of the dollar is more than its inflow.

The demand of the dollar makes it stronger in comparison to rupee.

If this scenario continues it's not at all a healthy sign for the Indian economy.

As a simple theory for a healthy economy its exports must be greater than its imports in order to create a current account surplus and this will appreciate the rupee.

• The Trade War

The Trade war between US and China and between Turkey and US is also affecting the dollar and the Indian currency.

• Foreign Investors

Foreign investors are also withdrawing money from India's securities markets and are standing on the sell side.

Foreign Institutional Investors (FII) withdrawn a large chunk of money from the Indian markets which ultimately had an adverse impact on the equity markets.

While there are several reasons affecting the prices of Indian rupee and dollar, rising prices of crude oil is the most dominating factor followed by current account deficit, trade war and foreign investors activities . But the recovery, the normalcy and stability conditions in the rupee  is expected soon.


Authored by :
Prashant Kumar Mishra 
Founder of Finomenal Wealth