Depreciation of Indian currency

Any currency can depreciate by demand and supply issues or by Administrative action by Government agencies . If it happens by demand and supply issues it is told “because of market forces”. When it happens through administrative action then it is called ” devaluation”. Rupee value is determined by demand and supply for Dollar. When supply of rupee increases then there is over supply of rupee. So demand for rupee comes down which leads to fall in rupee value which means rupee depreciates. When supply of Dollar comes down because of its excess demand then value of Dollar increases and rupee supply increases and rupee depreciates. Basic reasons for rupee depreciation are interest rate hike by U.S. Federal Reserve due to increase in inflation , Russian invasion of Ukraine and concerns in China due to the covid 19 surge. Since March 2022 US Federal reserve kept on increasing its benchmark interest rate which has led to sell off in share markets in emerging economies and pull capital away from countries like India back into United States. So demand for Dollar increased. India is a major importer of crude oil,metals,electronic items etc. When Indian rupee depreciates Indian importers need to pay more for the same item. This increases inflation. With the increase in inflation and fall of Indian rupee the medium and small scale industries get badly impacted and thus leads to unemployment. To check depreciating rupee government can restrict import of non essential goods or increase the import duty on them. Foreign Direct Investment can be increased to increase capital inflow. India is also a top importer of edible oil. A weak currency will further escalates imported edible oil prices and leads to higher food inflation. Weak rupee helps exporters as they get more rupee against their product. Current account deficit is bound to widen as foreign exchange reserve depletes and rupee weakens. Thus depreciating rupee is a cause of concern as India imports many essential items for consumption and industrial needs.