Indian Rupee depreciated against the US Dollar, reaching Rs. 79.65 per US Dollar, a new low. Why Should I Care? What’s in it for me?
Well, Well, Well……..
It does affect you directly or indirectly, even if you don’t care. But How?
Currency prices fluctuate purely based on demand and supply rules—more demand for a particular currency, more price rise for the same, and vice versa. COVID-19 pandemic has resulted in business shutdowns, huge job loss, etc. To keep the overall economy from entering into recession, the US Fed started printing money and handed it directly into the hands of people in the US, but that “Free Money” made its way to India through FIIs. That resulted in the appreciation of the Indian Rupee, and RBI touched a record foreign exchange reserves.
Now, inflation has touched an all-time high worldwide. It is due to supply chain disruption, China Zero COVID strategy, and the Russia-Ukraine war. To curb inflation, the US Fed started increasing the interest rates and trying to suck back the excess money they printed at the beginning of the pandemic. This resulted in a substantial Foreign exchange outflow from the Indian economy. According to the demand-supply rule, an increase in the demand for the dollar against the rupee increased the price of the dollar.
But now you might argue that the effect of the pandemic is easing all over the world, the supply chain is slowly back on track then why is the rupee still falling?
Well, there is a prediction among the major institutions and researchers that there is a chance of a recession in many countries. Yes, you heard that right. A recession just like we experienced in the 2007-09 Subprime crisis. Consumer sentiments all over the world are not the same as they were before the pandemic i.e., because of inflation, purchasing power has gone down drastically.
Now, keep in mind that the Dollar is a world reserve currency i.e., if a recession occurs anywhere in the world, the dollar as a currency will not depreciate rather it appreciates as its demand increases because it will be accepted by everyone. As mentioned above, there are predictions that the major economies all over the world will experience a recession by the end of this year. That is why people are playing a cautious game and trying to maintain liquidity in dollars and according to demand-supply rules, as more people demand dollars, prices will rise in the currency market.
Will there be a recession? We don’t know. If a recession occurs, then what do you think will happen to the dollar-rupee exchange rate? For now, it’s a wait-and-watch situation. Till then let us know your opinion on the same.