On 11th June 2013, Indian Rupee touched a record low of 58.96 to a Dollar. Till 1975 India followed a fixed rate system, also known as ‘pegged currency system’ or ‘Bretton Woods System’. Most countries abandoned this system in 1973. India abandoned it in 1975 and moved to ‘floating exchange system’ in which the value of the currency is determined by the forces of demand and supply.
1) Why Devaluation?
When Rupee is devalued, Americans can buy a lot more Indian goods with $1 i.e. our exports increase. China intentionally devalues its currency Yuan in order to keep exports high and thus increasing its Foreign Exhchange (Forex) Reserve.
But there’s also a flip side to this:- India imports a lot of crude oil from the Middle East. Now assume a hypothetical scenario where 1$=400Rs. You’ll have to pay nearly four times the amount that you are currently paying for oil. This leads to inflation. So, too much of devaluation is bad.
2) Trade Deficit:-
India’s imports are much more than its exports, causing a trade imbalance. To avoid depletion of its Forex reserves, India needs to increase its exports and for that it devaluates its currency. (Stated above, with lower value of rupee, Americans can buy much more from India, hence exports increase.)
3) Demand and Supply
Suppose you want to import something from abroad. You go to an exchange to convert your rupee to dollars. Since India’s Imports>Exports, there are many people who convert rupees to Dollars. Since there are a lot of people are ready to give their rupee in exchange for dollars, the value of Indian Rupee decreases.
4) Capital inflows in the country:- When the rupee is devalued, NRIs tend to send in a lot of money. The IT sector too generates a lot of dollars. Though this capital inflow is not enough to make up for the trade deficits.
5) Inflation:- Due to low growth as well as increase in food and fuel prices, most Indians tend to keep the money away from India. Global investors are nervous about investing in India due low economic growth, as well as recession in their respective countries. This adds further pressure on selling the Rupee.
Advantages of high Forex Reserves:-
- China has Forex Reserves of around $1400 Billion. It could send all its Dollars into the American market. This will cause a sudden increase in liquidity in US and hence a collapse of US Markets. Hence China is feared/respected by the Western Countries.
- Or maybe a country with huge Forex reserves could support nation building in poorer countries, thereby getting its support in resolutions in United Nations.
Bottom Line:- Low value of Rupee doesn’t mean a weak economy. It’s simply a result of demand-supply dynamics of the market.
Nikhil Thakkar's Webspace 
Well, you miss many things. Firstly, currency is traded like shares not just on spot market but also in futures. In India, we do not have wide base of currency traders like in west hence in all probability it is in the hands of speculators. The only agenda of speculators is to book profits. These traders speculate what could be Re value in next 3 to 6 or more months .So spot traders they get a consolidated get big consolidated picture. If these future traders also happen to be spot traders, then situation is no different from IPL fixing. In all probability this is the situation as we do not have wide & well spread participation in currency market(like in matured markets of west).
Also, Govt may support directly or indirectly as it helps them to create inflation, which means all citizens will pay higher taxes virtually every day without hiking tax rates. For example, if you import $100 at Rs 55, you pay at 35% taxes of Rs 1925 but the same item at Rs 65,you pay Rs 2275 i.e.Rs 350 more Thus not only prices of all import commodities will increase but all types of taxes of central & state taxes reaps high tax collection. Since oil & imported coal price goes up, cost of domestically produced items will see high inflation.This inflation now is not just limited to commodities but affects assets like properties, capital items, etc. Thus.weak Rupee will no more help economy like it helped decade back when India was in infancy(less inflation) but now 360 degree inflation counter balances quickly
Additionally, many people want see weak Re for different reasons. Now domestically oil & gas producers like Reliance, Vedanta, etc. use $ based pricing though they are paid in Re. We can’t rule out big players behind this great fall unlike never before.
Thus, weak Re can create havoc & can make economy instable.Govt must put control & cap daily variations because as said before we do not have large public participation in currency trading like in west. This game is in the hands of traders but real suffers are people though they are not party to these speculative traders.
LikeLike
As it said that low vallue of ruppe doesnt
mean weak economy.As it good to make
indian market currency balance .But its too important growth for economy.As first of all india is still suffering poverty and 2nd the sudden increase of value if money cause great disharmony amoung some middle and lower cast.If india want be like foreign then it school imcrease employment oppurtunities just peep in swish bank .what the use of just keepying when not using it in good way makeing indian a good nd healthy country.Abd their is alot of cast as well as equal power utillity were too much pressure is on indian .They will be a time when people just push themself towards foreign calls an their will b only people like zombies in india
LikeLike
Low value of Indian rupee does not mean that it is a weak economy that is what it is said. ok i will agree to it but low value of currency means the value of the country’s currency is low in the market.
for example 1$ cost 55 in past and no it cost 66 it means the values of the country’s currency has fell as u all know
But my question is why .Why has it increased from 55 to 66 . The same 1$ that cost 55 changed to 66 is there a reason behind it ????
there may be but my question is why .
is it to increase export . If yes i do not see the reason to increase the values of currency . It will increase the value of goods in the country .
It may also affect the lower sections of the society . It may also increase poverty tax rate will increase and behind it the value of all the goods may also increase.
my opinion is that the country should try to produce as much goods as it can so we can reduce import hence saving more for the development of the country
THIS IS JUST WHAT CAME TO MY MIND WHEN I WAS STUDYING INFLATION
I DID NOT MEAN TO OFFEND THE PROCESS OF EXPORT OR IMPORT
BOTH IMPORT AND EXPORT ARE NECESSARY FOR EVERY
COUNTRY IT RESULTS IN THE DEVELOPMENT OF THE ECONOMY
I JUST WANT PEOPLE TO THINK ABOUT THIS THAT IS ALL
THANK U FOR READING THIS
LikeLike
Value of currency indicates country’s relative economic, internal, and external stability and also political stability. In reality, Rupee should be three times its present value if not more. This may eventually happen in longer term with all above parameters falling in place. In 80’s dollar was under 10 rupees and rupee was partially convertible even then. If China has huge dollar reserves, then it also means that they are sustaining dollar value artificially by demand-supply equation and US dollar is at their mercy. Other currencies are not significant as most trade in world today is in terms of dollar. Euro as such is very unstable and has never gained popularity and trust. Rupee gradually lost trust since independence and became such a low value currency. In 50’s rupee was well accepted currency around India but not today. In a few years, perhaps, we may return to our lost glory and reestablish ourselves as trustworthy country with trusted currency and rupee may become prominent again with resurgence in value. With political stability returned and cohesive policy and vision in place, this direction is taken and we are on our way to regain our lost value. Hope this happens in a decade or two.
LikeLike
ass we all know Indian currency is declining day by day.Acc to me this problem is directly related to the droughtness coz 70 % of the agricultural land is not cultured yet and instead India is the second largest food producing country after China. the govt. should hv to give this responsibility to the private companies to provide water in all the rural areas and in exchange govt. will take less taxes to those company. And the industries which are to be established in those rural areas should have to take the responsibility to provide water in that area.in exchange they should take a amount of percentage from the profit of the farmer or only irrigation fee.
It was only an idea which into my mind .Thanks for reading.
LikeLike
I think if indian economy try to follow the dollar,that is why indian rupee chance to loose their glory,every countries have various option to up their currency value,but our country have no such as option,if we try to improve our agriculture sector but it will be failed,becuase there r no prominent government rule to move this sector,secondly, no foreign traders would be never this country,thirdly lack of natural resources.
LikeLike
Very dangerous currency.but I think INR have been stable with one level.ok.I cant understand till now why we deposit our money in the bank.pls describe it.
LikeLike